How Trump Can Win With China
Beijing has been seriously outmaneuvering Washington for years. Trump is off to a lousy start, but here’s how he can turn it around.
By his own admission, President Donald J. Trump is a brilliant businessman, a master negotiator, an exceptional deal maker, somebody who always wins. When it comes to China, he is prepared to do just that — win. “I’ve read hundreds of books about China over the decades,” Trump wrote in his 1987 bestseller The Art of the Deal. “I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.” If that’s the case, Trump should know that he is about to be seriously outsmarted by a country that has been spectacularly outmaneuvering American policymakers and businesses for at least a decade.
Dealing with President Trump will not be a novelty for Chinese leaders. The country is littered with eccentric and egotistical real estate billionaires. In fact, Trump has much in common with China’s leaders. The Chinese leadership is also outwardly bold and confident but inwardly paranoid and insecure. Like Trump, they create and repeat “alternative facts” until they are considered truths. Like Trump, they allow no insult or slight to escape retribution. Unlike Trump’s, Chinese retaliation is not a 6:00 a.m. Twitter tantrum but a well-studied and carefully targeted response that will deliver maximum punishment.
Trump will also discover that China is ahead in the “great” game. China has focused on “Making China Great Again” for the past four decades. While China concentrates on the industries needed for 2030 and beyond, Trump’s China trade policies are better suited for the 1950s. China is concentrating on dominating advanced manufacturing, with its semiconductors and robotics, as well as aerospace, biopharma, new materials, advanced medical devices, and beyond. Trump’s trade team is saddled with a back-to-the-future agenda that concentrates on preserving heavy industry through tariff barriers and currency complaints.
By killing the Trans-Pacific Partnership (TPP) without an alternative plan or vision, Trump has left our Asian allies twisting in the wind, with little choice but to sign on to the Chinese value proposition of providing money, infrastructure, and market access in return for settling in under China’s economic and security umbrella.
If Trump now plows ahead with trade remedies focused on yesterday’s problems, as his threatened 45 percent tariffs on Chinese exports and focus on Chinese currency are, American business and their global supply chains and sales channels will be hammered.
Instead, Trump should focus on three things in resetting U.S.-China trade and business relations. First, all discussions and agreements should be based on true reciprocity. We can’t do it there, you can’t do it here. For example, nontariff barriers have squeezed foreign insurance companies into less than 6 percent of the Chinese market. So cash rich Chinese insurers such as the Anbang Insurance Group are using the enormous wealth earned in their protected market to try to acquire insurers across the globe including Des Moines-based Fidelity & Guaranty Life.
Second, revive Section 301 of the Trade Act of 1974 as well as other trade enforcement tools that allow the president to impose retaliatory tariffs and other penalties when the United States believes trading partners are pursuing unfair policies. WTO rules prevent the United States from using these tools against fellow WTO members. Third, and perhaps most important, resurrect, rejigger, and rebrand the TPP. A revitalized and expanded Trump Pacific Partnership would demonstrate America’s desire to be partners with our Asian allies in their economic success.
Trump will need to thoroughly think through his China trade policy as U.S. multinationals present a ripe target for Chinese redress. China is often the largest or fastest — or both — growing market for U.S. companies in industries ranging from aviation to telecommunications to silicon chips to automobiles to food and agriculture. China’s creative retribution skills were on full display when the European Union imposed tariffs on Chinese solar panels a few years ago. China responded by going after Europe’s nearly $1 billion in wine exports to China. The solar panel dispute was quickly resolved.
More than 50 percent of Chinese exports are produced by foreign-funded factories. Foreign firms account for 70 percent of high-tech exports. And China was responsible for nearly 40 percent of global growth last year. So Trump’s plan for 45 percent tariffs on Chinese exports to the United States could knee-cap leading American companies and roil the U.S. stock market.
Three days before Trump took the oath of office, Chinese President Xi Jinping was effusively welcomed as the new champion of global stability at the World Economic Forum (WEF) in Davos. “In a world marked by great uncertainty and volatility, the international community is looking to China to continue its responsive and responsible leadership in providing all of us with confidence and stability,” WEF founder Klaus Schwab said in introducing Xi.
In his keynote speech, Xi warned that “no one will emerge as a winner in a trade war” and that the world’s leaders must “say no to protectionism.” The day after Xi’s WEF keynote, the American Chamber of Commerce in China released its annual member survey with 80 percent of respondents stating they feel less welcome in China and some 60 percent — citing extensive and accelerating protectionism — saying they have little or no confidence China will further open its markets in the next three years.
The George W. Bush and Barack Obama administrations were both focused on avoiding drama in their relations with China. Neither administration had a consistent, well-articulated China strategy. Instead, various agencies including The Departments of Commerce, State, Treasury, and Defense, the U.S. Trade Representative Office, and other agencies carried out individual agendas. This worked well for China, which specializes in playing the barbarians against each other and wearing them down through a mixture of feigned compliance to rules, distracting disinformation, belligerent defiance, and theatrical diplomacy. “The United States is being massively outmaneuvered and the government doesn’t even see it,” a former senior U.S. trade official told me about interactions with China.
When it comes to U.S.-China business, trade policies, and practices, the Chinese system seems to be working better for China than the American system is working for America right now. That is something that the Trump team has right.
Chinese authoritarian capitalism: incompatible with existing systems
The Chinese Communist Party and the government it controls operate somewhat like the War Production Board the United States created during World War II. Through this organization, American industry and government managed the U.S. economy and society to win the war, coordinating the country’s manufacturing and allocating and managing resources. The United States became the world’s largest centrally planned economy overnight. By the end of the war, the country had more than doubled GNP, the board was disbanded, and the U.S. manufacturing powerhouse was turned into a consumer product and export machine.
China’s system is not aimed at war but at making China rich and powerful. Whether it is hackers from the People’s Liberation Army, industrial planners, commerce regulators, state-enterprise bosses, private companies, state banks, or scientific institutes, these entities are all part of the party-led machine aimed at “Making China Great Again.” This all adds up to a unique system of authoritarian capitalism that is a mismatch with the established global systems for governing trade and investment. A secretive party-led system that controls bureaucracies and businesses doesn’t fit with the international trade and business frameworks of transparent rules and private enterprise. Neither the WTO nor the major U.S.-China bilateral dialogues are effective in dealing with China today.
The 2008 global financial crisis convinced many in the Chinese leadership that foreign businesses need China more than China needs foreign investors. Real muscle was put behind the idea that foreign market share in China must be contingent on what the foreigners were doing to help China move ahead. When he came into office in 2012, Xi characterized this as China’s “catch up and overtake” stage.
In my dealings with American business, I have seen firsthand the effects of China’s toolbox on foreign multinationals operating in China. This toolbox includes cyber theft and physical theft of technologies from leading U.S. multinationals and military contractors, an array of capital requirements, tailored technical and scientific standards, unpublished regulatory barriers and anti-trust rules aimed at promoting local companies, to name a few. Companies that complain are swiftly dealt with through dawn raids, anti-trust actions, tax audits, and other “sticks.”
Time for a reset built on the bedrock of reciprocity
As both an observer and participant in this narrative of interactions between the United States and China over the past 30 years, it has become clear to me that a smart reset in U.S.-China trade and investment relations is absolutely necessary.
The first step is to revamp the system that works so well for China. Our two major annual dialogues with China need to be reconstituted. The Joint Commission on Commerce and Trade (JCCT) and the Strategic and Economic Dialogue (S&ED), which involve almost all U.S. cabinet secretaries, Chinese ministers, and hundreds of officials below them, have become dialogues of the deaf.
China has caught on to our love of procedure. But China focuses on outcomes. These dialogues provide a convenient channel to keep America bogged down in process while China’s most damaging industrial policies speed along with results. “China uses this to control us,” former U.S. Trade Representative Charlene Barshefsky said of the dialogues at a U.S. Chamber of Commerce forum I participated in last year.
Chinese and American leaders constantly proclaim that the U.S.-China relationship is the most important in the world. If so, why isn’t there a purpose-built annual president-to-president meeting instead of a series of meetings on the side of various multinational forums.
My advice to the Trump administration is to suspend the JCCT and the S&ED. I was a participant in the S&ED’s CEO dialogue last June, where Secretary of State John Kerry and Treasury Secretary Jack Lew seemed attentive and energized; the senior Chinese officials appeared to be just going through the motions.
Suspending these dialogues will catch China’s attention. The dialogues can resume when China agrees to an annual two-day, president-to-president summit modeled on the Obama-Xi Sunnylands forum held in June 2013. This summit can alternate between each country and must be structured to produce solid agreements with enforceable outcomes. My guess is that China will be amenable to this as Chinese leaders have always preferred direct communications between the White House and Zhongnanhai for important discussions. Once this Sunnylands style forum is established, the JCCT and S&ED can then be reconstituted to work out details and ensure accountability.
Reciprocity should be the bedrock underlying trade and investment agreements between China and the United States. Our negotiations should be judged on achieving enforceable reciprocity, by which I mean China will have to be judged by its real actions not its promises. This will be complicated, and will pose difficulties for the lawyers, but it’s not impossible. For market access and cross-border investment, what is allowed in one country should be allowed in the other.
Increasingly, China watchers in the corporate world and Washington policy advisors who I talk to are increasingly suggesting including America’s economic security as a consideration when the Committee on Foreign Investment in the United States (CFIUS) reviews foreign investments and acquisitions. Normally, the committee only considers national security implications. Expanding this to cover economic security would take the United States too far down the road of protectionism.
Instead, the United States should focus on reciprocity. No Chinese-connected entity should be allowed to invest in or acquire U.S. assets unless American companies have equal market and acquisition access in China. This would require applying “regulatory reciprocity” that takes into account the real on-the-ground situation in China. Rather than accepting China’s assertions of openness, the United States must carefully assess China’s market-distorting policies that block foreign business. For example, by failing to implement its 2001 WTO commitment to open its payment sector to foreign companies, China facilitated the rise of China UnionPay’s monopoly and Alibaba’s online payment domination. In late January, Jack Ma’s Alibaba spinoff, Ant Financial, announced the acquisition of MoneyGram for $880 million. The Texas-based company has 347,000 agent offices in more than 200 countries.
The Trump Pacific Partnership could be “huge”
The pity is that the TPP, from which President Trump withdrew in his first week in office, is one of the most promising avenues to influencing China’s behavior. China’s sidelined reformers have, very quietly, been looking to TPP to spur domestic economic reforms. The TPP trade bloc includes 40 percent of global GDP, but China is not party to the accord. If the TPP passed, the Chinese leadership could be incentivized to enact long-promised economic reforms and remove market access barriers in order to compete as the TPP sparks increased trade and investment among member countries.
The TPP’s larger purpose is to provide a template of modern trade agreement language that takes into account today’s business world of global supply chains, cross-border investment, intellectual property protection, and unfair competition from protected state-enterprise. It is an open secret that China’s portfolio of trade and investment transgressions were the inspiration for TPP once the United States joined in.
U.S. ratification is essential. The agreement only takes effect if 6 countries comprising 85 percent of the GDP of the bloc have signed. Twelve Pacific Rim countries are involved: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.
In withdrawing, the United States has left China in the driver’s seat on Asia trade agreements. China is now leading the push for the Regional Comprehensive Economic Partnership (RCEP), which excludes the United States but includes all the important Asian economies as well as Australia and New Zealand. In a memo written upon his departure as Obama’s U.S. Trade Representative, Michael Froman warned that jettisoning the TPP “will be our loss and China’s gain” as the 16-country RCEP “would not protect labor and the environment, would not ensure Internet freedom, would not protect patents or trademarks or copyright from infringement, counterfeiting, and piracy, and would impose no disciplines on state-owned enterprises.”
For the United States, the TPP is a distressed asset that needs to be resurrected. Given his business expertise in turnarounds, Commerce Secretary Wilbur Ross should be a natural at this. Trump can unleash his unsurpassed “art of the deal” negotiating tactics and his legendary marketing savvy to work out a few face-saving tweaks and revive the TPP. There is little doubt that this would sail through the GOP-dominated Congress. Our allies in Asia would be hard-pressed to wring their hands about the United States abandoning Asia when the president has pasted his own name across the region.
Now the real threat: Chinese techno-nationalism
Remember Deng Xiaoping’s “reform and opening” mantra? For the past decade, China has been increasingly pursuing a policy of “reform and closing.” Reforms are focused on promoting Chinese companies, especially SOEs, while gradually closing sector after sector to foreign companies.
The foreign business community was almost shocked at the extent of China’s opening under the WTO. Then-Premier Zhu Rongji appeared to believe that if Chinese companies couldn’t compete against foreign firms in their own market they would never be globally competitive. China lost confidence under the administration of President Hu Jintao and Premier Wen Jiabao. They began turning the clock back with a 2006 directive requiring a couple of dozen core industrial and ICT sectors — including telecommunications, power generation, automobiles, aerospace, equipment manufacturing, chemicals, air freight, architecture, steel, and science and technology — to be completely owned or controlled by SOEs. They also wheeled out the “Indigenous Innovation” campaign aimed at transforming China into a technology powerhouse by 2020. Chinese “national champion” SOEs were directed to obtain technology from their multinational partners through “co-innovation and re-innovation based on the assimilation of imported technologies.”
|Indigenous Innovation||Telecommunications, Power Generation, Automobiles, Aerospace, Equipment Manufacturing, Chemicals, Air freight, Architecture, Steel, and Science and Technology|
|Strategic Emerging Industries (SEIs)||Clean Energy Technology, Next Generation IT, Biotechnology, High-end Equipment Manufacturing, Alternative Energy, New Materials, and Clean Energy Vehicles|
|Made in China 2025||Advanced Infotech, Automated Machine Tools and Robots, Aerospace and Aeronautical Equipment, Maritime Equipment and High-Tech Shipping, Modern Rail Transport Equipment, New Energy Vehicles and Equipment, Power-Generating Equipment, Agricultural Equipment, New Materials, Biopharma, and Advanced Medical Devices and Equipment.|
Table by James McGregor
This blueprint for massive technology theft caused an international outcry that resulted in a 2009 rejiggering of Indigenous Innovation into the Strategic Emerging Industries (SEIs). With the SEIs, party leaders sought to leap into the future and focus on next-generation technologies and products. As much as $2.2 trillion was earmarked for investment in the chosen seven industries.
China’s quest to develop strong domestic technology and industry was heightened by Edward Snowden’s paranoia-inducing 2013 revelations of secret U.S. government electronic surveillance. This has spurred China to unabashed techno-nationalism, with “Made in China 2025” as the headline policy. Inspired by Germany’s Industrie 4.0, the goal is to go from “Made in China” to “Made by China” via intelligent manufacturing. The plan calls for Chinese companies to produce 40 percent of core components and materials in China’s manufacturing chain by 2020, and 70 percent by 2025. Chinese firms are directed to create their own tech standards and become strong participants in international standard-setting bodies.
Semiconductors are at the top of the list of America’s threatened industries. Chinese policymakers are extremely worried about the country’s reliance on foreign chips, as China consumes more than 50 percent of semiconductors globally but relies on imports for more than 80 percent of those chips. No Chinese companies are in the top 20 in global semiconductor sales.
After spending billions trying to develop domestically, China is now focusing on acquisitions. Between January 2014 and August 2016, out of 991 mergers and acquisitions in the global chip sector, almost one third involved China. Chinese state media has reported that as much as $160 billion will be aimed at funding China’s domestic semiconductor industry in the next decade. Much of this money is coming from pools of state enterprise and government funds that are being parked in government-backed private equity funds.
Finding a comfortable place between suicide and self-destruction
Leading American multinationals are feeling squeezed between the pressure from China to contribute to building China’s advanced technology capabilities in exchange for market access, while also maintaining a strong U.S. innovation and manufacturing base.
GE has suggested that considering itself stateless may be necessary in order to deal with the breakdown of globalization and the rise of protectionism. In a May 2016 speech, CEO Jeffrey Immelt said with 70 percent of the company’s revenue outside the United States, future “sustainable growth will require a local capability inside a global footprint.” Immelt added, “In the face of a protectionist global environment, companies must navigate the world on their own.”
In other words, American multinationals could consider themselves to have allegiance only to their shareholders and therefore the flexibility to adapt to whatever requirements they face in the countries they operate in. If leading American multinationals adopt this stateless stance, it will be much easier for them to deal with China’s techno-nationalism. Sharing and selling technology to China would then be mere commercial deals without consideration of where the technology was created and the effect on U.S. economic security. China would be quite happy with this outcome.
The truth is that for many multinationals their best days in China are behind them. Chinese companies are catching up quickly and multinationals are no longer considered valuable friends deserving of special status. Today’s calculation is not complicated. To enjoy decent market share and profits in China, multinationals must help China reach its targets, even if the ultimate aim is to replace them in China and beat them globally. What can companies do? I tell tech and industrial multinationals that they need to find a comfortable place between suicide and self-destruction.
Foreign multinationals in China are committing suicide in China if they do not recognize that things have changed profoundly. Double digit growth and dominant market share are gone or going, depending on the capability of Chinese competitors. It is suicidal to power forward with expectations of eternal market leadership and a focus on quarterly returns. China has not hidden its plans to replace foreign technology.
Self-destruction is the other extreme. Companies in this category engage in preemptive capitulation, spooked by China’s techno-nationalism. More than a few U.S. multinationals have handed control or significant portions of their business to Chinese competitors. Chinese officials have been known to forcefully instruct foreign executives to follow the example of IBM, CISCO, HP, and others who have worked out a variety of licensing agreements and equity sales deals with SOE competitors. Each of these companies has done so for their own internal and competitive reasons. Nonetheless, Chinese bureaucrats hope that intimidation and some name-dropping will inspire others to capitulate.
China needs a deal and so does the United States
Despite America’s infatuation with the notion that free markets always win, the truth is that a combination of mercantilism, protectionism, industrial planning, and markets have built every successful national economy. America’s current celebrated Broadway hero, our first U.S. Treasury Secretary Alexander Hamilton, in 1791 laid out some basic rules that foreshadow China’s policies of the last couple of decades. In his 1791 report to Congress, Hamilton proposed protective tariffs, import bans, subsidies for encouraged industries, export bans on key raw materials, prizes and patents for inventions, the regulation of product standards, and the development of infrastructure for finance and transportation. This basic blueprint lasted in the United States for about the next 150 years. Many others, including the Asian Tiger economies and Japan followed this path. China got its start in 1994 with the “Outline for Industrial Policy” that copied many of Japan’s protectionist policies and designated electronics, machinery, petrochemicals, automobiles, and construction as pillar industries.
So we have no reason to demonize China. Perhaps we should even congratulate China on its masterful performance. The country has gone down a well-worn path. But current Chinese policies are at the end of the road. China’s market and its industrial machine are now so mighty that protectionism and mercantilism amount to a form of global economic warfare.
How do we make a U.S.-China deal? China needs outward investment to gain the technology and know-how to modernize and diversify the country’s industrial and financial assets. The United States needs to protect the country’s technology base and rebuild our industrial base. Both sides are focused on jobs.
Our economies are deeply intertwined. China is the U.S.’s third largest trading partner and fastest growing export market after Canada and Mexico. American exports to China have almost doubled while Obama has been in office. China is also our most important counterpart in addressing global threats such as climate change, North Korea, and Middle East turmoil. America has to acknowledge and accept that China is on its way to building a global economic, political, and military footprint to rival the United States. But even there we have shared interests. Both countries value trade for its economic importance, global freedom of navigation, and protection of citizens and assets abroad.
The Communist Party is as vulnerable as it is formidable. China’s authoritarian system will crush anybody who challenges the party or makes the system look bad. But the leadership also runs scared of its own population, which has incredibly high expectations after experiencing decades of exponential growth.
Control in China involves balancing repression and reward. So far, Xi has been focused on repression and instilling fear. But he needs to bolster his legitimacy through jobs and improving living standards.
U.S. military and trade tensions: the opposite of what Xi needs
When he became chairman of the Chinese Communist Party in November 2012 and president of China the following March, Xi was confronted with a huge mess: declining GDP, a festival of systemic corruption, festering social tensions, environmental degradation, and a rapidly aging population. On top of this, China’s economic formula of debt-fueled infrastructure and a reliance on exports was running out of gas. To keep growth going, Xi needs to transform the economy into one driven by consumption and boosted by innovation and entrepreneurship.
He also has to rebuild trust in the party and confidence in China’s future. His predecessors led a decade of every-man-for-himself corruption. Leading party families busily stashed away billions. To start on his task, Xi grabbed the tools of Mao and cultivated a sense of crisis: The great rejuvenation of China was being impeded by hostile forces who wanted to keep China poor, the United States was encircling China militarily, and Japan was stealing Chinese islands while Southeast Asia wasn’t admitting that China owned the South China Sea.
Though he sent his daughter to Harvard, Xi sees liberal Western values and Westernization as the death knell for China. He is not interested in integrating into the system built by the West. China joined global organizations while globalizing, but party leaders don’t feel the need to follow the rules as they weren’t at the table when they were made. China must “unswervingly walk a path of its own,” Xi said.
Accordingly, Xi sees himself as the third transformative leader of post-dynastic China, behind Mao Zedong and Deng Xiaoping. He is haunted by the Soviet collapse, as “nobody was man enough to stand up and resist.” Xi is focused on a sacred mission to save the arty for his father’s generation of revolutionaries. His overarching message has been the promise of the China Dream, the Chinese equivalent of Making China Great Again.
Smoking and drinking and still going strong
One year into his term, Xi unveiled an impressive portfolio of economic reforms. So far, they appear stillborn.
Independent Chinese economist Andy Xie likens the Chinese economy to a fast growing teenage boy — strong, energetic, and quick to take up bad habits. Even after many late nights of drinking and smoking, the teenager still feels invincible. For the Chinese economy, the vice is debt. China’s bureaucrats know that continued credit binges are unhealthy and will eventually lead to catastrophe. But the debt debauchery is not causing immediate disaster, so why curtail the fun?
This is also an election year for China. In the fall, the party will inaugurate a new leadership lineup, with Xi continuing into his second five-year term. While America’s elections are loud shout-and-insult festivals open for the world to see, the Communist party’s political contests are bare-knuckled backroom brawls involving families, factions, blood feuds, and ideological disputes.
Xi has made many enemies with his anti-corruption campaigns; suppression of internal party debate; crackdown on academics, lawyers, and journalists; resurrection of Marxism; and a return to strongman Leninist control centered on himself. We can be certain that Trump’s agitations will only consolidate Xi’s power and help cement a circle of hard-liners. On the other hand, if Xi is able to cut a deal with Trump prior to the 19th Party Congress in October or November this year, a path back to peaceful coexistence may be possible.
Don’t forget China is worried about losing access to the world’s most advanced technology and overseas export markets. Chinese officials are very clear that the populist fervor that fueled Trump’s election is at odds with the globalization that has enabled and nourished China’s rise. As China’s lead WTO negotiator Long Yongtu said at a forum I attended last October: “China does not want to see the reversing of globalization. If globalization is diminished, that will be the end for all of us.”
The agitator, the litigator, and the deal-maker
It will be up to Trump’s trade negotiators to figure a way forward with China. His Trade Trio consists of an agitator, a litigator, and a deal maker. It is unclear which of them will be in charge of the administration’s China trade policy.
The agitator is Peter Navarro, a Harvard Ph.D. economist and University of California Irvine professor, who is heading the newly created White House National Trade Council. He shares with Trump a profound dislike for taxes, regulation, and free trade. He also shares Trump’s slippery relationship with facts, at least when it comes to China. Navarro is to Chinese policy and economics what Breitbart is to news: He floats cubes of truths in a murky concoction of hyperbole, ignorance, and expedient simplicity.
Navarro is correct in his basic premise that China has been playing the United States and the global trading system though mercantilism, IPR theft, subsidized exports, and currency manipulation. But his three books and a documentary on China display extreme, shallow, dated, and distorted views. His 2012 documentary Death by China: How America Lost Its Manufacturing Base is the classic. As the Los Angeles Times described it: “There’s an important political argument at the core of Peter Navarro’s agitprop documentary … but it’s drowned out by xenophobic hysteria and exaggerations so rampant it becomes impossible to tell light from heat.”
The litigator is Robert Lighthizer, Trump’s pick for U.S. Trade Representative, a highly respected Washington, D.C. trade attorney who has worked with a wide range of multinationals on market access, antidumping, countervailing duty, and other trade litigation involving China. He was a deputy USTR during the Reagan administration, and prior to that served as Chief of Staff for the Senate Finance Committee, which has jurisdiction over trade.
Lighthizer explained his views on trade with China in his 2010 testimony to the U.S.-China Economic and Security Review Commission. In examining the first decade of China’s membership in the WTO, Lighthizer concluded that, “U.S. policymakers did not recognize the extent to which China’s economic and political system is fundamentally incompatible with our conception of the WTO” and “U.S. policymakers significantly misjudged the incentives for Western businesses to shift their operations to China and serve the U.S. market from there” and “the U.S. government has been very passive in response to Chinese mercantilism.”
The deal maker is Commerce Secretary nominee Wilbur Ross, a billionaire investor who has specialized in purchasing and turning around distressed businesses in a range of sectors including coal, steel, textiles, and banking. A close friend of Trump’s for two decades, Ross will likely have Trump’s ear. What he will say is uncertain.
Ross’ comments on China over the years have shifted depending upon the deals he’s worked on. As detailed by Max Abelson in Bloomberg Business Week, when Bush administration tariffs on steel imports helped Ross transform his investment in three bankrupt U.S. steel companies into an eightfold profit, Ross was vocally against free trade. When he later invested in several bankrupt U.S. textile companies and set out to expand their overseas operations, Ross was vehemently against protectionism. After investing with China’s sovereign wealth fund in a shipping company, Ross said the U.S.-China trade deficit was nothing to worry about. “I think that it’s total political nonsense, all the China bashing,” Ross said. “The trade deficit we have with the rest of the world is almost equal to the trade deficit we have with China, so what’s the big deal about China?”
Leveling the playing field with the “biggest trade cheater in the world”
During the campaign, Ross co-authored a trade and economic policy document with Navarro that described China as “the biggest trade cheater in the world.” During his confirmation hearing, however, Ross was more subdued. “China is the most protectionist country of very large countries,” he said. “They have both very high tariff barriers and very high nontariff trade barriers to commerce.”
Here is the way forward for Trump’s Trade Trio: Navarro, the agitator, has done his job. Keep him off of the China trade team. His real knowledge of China is as deep as a cookie pan. Have him employ his formidable talents in rabble rousing and hyperbole elsewhere. Perhaps Russia merits his attention.
As commerce secretary, Ross can employ his talent for turning around failed but promising assets by resurrecting the TPP. That is the single most effective thing the Trump administration can do to incentivize China to get back on the path of economic reform. Ross can shape the broad outlines of the reset in U.S.-China policy and be the leading evangelist for reciprocity.
The person to make it happen is Lighthizer. He takes over an agency that during the Obama years was focused on the TPP. U.S. Trade Representative professionals have the ability to shape revisions sufficiently for Trump to sell it and keep other signatories appeased. Most importantly, Lighthizer is an expert on trade law and the internal workings of the U.S. bureaucracy. This would give him a fighting chance at devising the complicated legal language and the enforcement systems necessary to shift to reciprocity with China.
He also clearly understands the political obstacles that lay ahead. In his 2010 testimony, Lighthizer was critical of the long prevailing U.S. government reluctance to anger China. He said U.S. politicians and bureaucrats have been misguided in their worries about confronting China on trade and commercial issues due to worries about discouraging China from helping with such geopolitical problems as North Korea or Iran.
“But this claim is really an argument for allowing current trends to continue indefinitely; there will always be some type of crisis where we could use China’s assistance,” Lighthizer wrote. “The key issue is not whether we want China’s help, but whether any potential help we may receive is worth the harm caused by China’s trade policies.”
The splintered U.S. business lobby needs to form a united front
While dealing with China will not be easy for Trump’s Trade Trio, handling the American business community could be equally difficult and complicated. When China was pursuing Deng Xiaoping’s agenda of “reform and opening,” the American business community was China’s best friend in Washington. But as China has refocused to “reform and closing” over the past decade, the American business lobby has become split and squeamish.
After the 1989 Tiananmen Square massacre, a powerful and effective pro-China business lobby formed around an annual congressional debate on renewing China’s Most Favored Nation trade status. This became a massive operation when the business community led the fight for U.S. approval of China’s accession to the WTO. Once China joined the WTO in 2001, the United States was forced by WTO protocols to discard our most effective toolbox of trade remedies.
Chief among these was Section 301 of the 1974 Trade Act. This provision empowered the president to order unilateral trade sanctions against protectionist trading partners. Section 301 was used in the 1990s to push for increased market access and IPR protection in China. Currently, the president can only use Section 301 in cases where there are neither international rules nor international dispute settlement provisions. So China now sits under the protective umbrella of the WTO’s dysfunction.
As China has geared up joint venture and technology transfer requirements alongside myriad market access barriers, many of America’s largest multinationals have bought into these distortions to protect their China market share. U.S. government officials now find themselves listening to companies screaming about China’s transgressions while also calling for the United States to do nothing.
The U.S. government is also all too focused on “the relationship” and losing China’s cooperation on geopolitical issues. One reason for this bias is that the White House National Security Council is overwhelmingly staffed by political staff and very few Commerce Department officers who understand the importance of trade and business to American economic security.
So let’s learn from China. When China wants to get something done, the party forms a “leading group” of senior officials to tackle the problem. The Trump White House would do well to form its own leading group on China that includes a wide range of government agencies and the business community. The focus should be on protecting America’s future prosperity and economic security.
Xi and other party leaders have been relentlessly pushing for the United States to adopt a “new model of great power relations” with China. So let’s do that. The United States and China can have “great power relations” based on reciprocity.
Lilian Rogers provided assistance with this article.
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