US China Trade War – It’s All About The Rules

The United States and China may be in the opening stages of a ‘trade war’ as they fling tariffs at each other. But in the fuss over steel, pigs, and soybeans one easily loses sight of the main issue.

And what is that?

Respected economist Marvin Feldstein described things correctly, but without intended irony: “What is needed is a change in Chinese behavior to conform to rules Beijing accepted when it joined the WTO (World Trade Organization) in 2001. So, let’s get this straight…after nearly 20 years the PRC still won’t follow rules it has repeatedly promised to obey.

This isn’t really about free trade – it’s about following the rules. And that’s as important in international commercial transactions as it is in baseball. Yet, nobody on the US side did much about it until a former real estate developer from Queens took office.

Previous administrations didn’t want the trouble from forcefully confronting China. US business were transfixed by the allure of selling one of something to every person in China. And many CEO’s were willing to sell their birthrights for a bowl of pottage. Even a once decent company like J.W. Marriott prostrated itself recently and cruelly treated a $14/hour employee in Nebraska to placate the Chinese Communist Party (CCP).

And Wall Street and the power law firms smelling ‘China fees’ resemble hyenas getting a whiff of carrion. Finally, there’s the Wal-Mart effect – supposedly saving the average American family between $800-2,000 annually by buying cheap Chinese-made products. Quite a deal in exchange for hollowing out American industry.

But while the PRC can be lucrative for some companies for a period of time, more and more American firms are realizing the deck is stacked against them in China.

Perhaps sensing further trouble, China’s President Xi has promised additional tariff reductions and further opening China’s financial markets to foreign companies – as if that solves anything. One is skeptical given the last few decades of Chinese unkept promises? A trial lawyer would be hard pressed not to ask: “Were you lying then, or are you lying now?”

One fairly doubts Xi even wants to change the China market – other than doing just enough to make gullible foreigners think ‘this time is different’. And even if he was sincere, it might be impossible.

The CCP would need to transform China into a country with property rights, rule of law, and the ability to impartially enforce a contract. And then there’s technology strong-arming and theft that appear to be part of the Chinese business model – if not national imperatives – along with a government that will do anything to help Chinese companies exterminate foreign ones. All in all, it’s hard to imagine China changing enough anytime soon.

Can China survive a trade war? If the Trump administration in fact intends to follow through, recently imposed tariffs are best viewed as an ‘attention getter’.But a simple tit-for-tat approach on particular Chinese products isn’t likely to work. China can absorb plenty of discomfort. China and the Chinese (except for 50 million of them) survived Mao Tse Tung after all. And Wall Street and the American chattering class have already started complaining, as have farmers and even oilmen – directly affected by tariffs and Chinese counter-tariffs.

But while the PRC is unlikely to collapse, there are reasons to think something’s amiss behind Xi’s bold face and claims of a rock-solid Chinese economy. Of course, nobody believes the PRC’s 6.5% growth figures – magically achieving government targets every year. And bad loans and debt remain a huge problem – unless one believes the Chinese have figured out a way to run an economy nobody else in human history has.

Moreover, money has been pouring out of China for the last few decades. This resembles a ‘futures market’ – as people benefiting most from the system express their doubts about its future – trying by any means possible (legal or otherwise) to get their wealth out of the country – along with a relative with a ‘green card’ and into a bolt hole in Vancouver, Manhattan, Sydney, or the like. The PRC has tightened capital controls and has exchange controls – and government’s only do that when they’re worried about something. Nonetheless, money still pours out of the country.

Next, the One Belt One Road (OBOR) scheme is impressive on paper. But how many of these projects will actually be profitable? PRC government efforts to attract foreign countries (particularly Western ones) and foreign investors sometimes appear frantic – resembling an investment advisor pushing a ‘can’t miss’ investment – but not willing to risk much of his own money. Interrupt foreign investment and technology going into the Chinese economy – as US pressure just might do – and it may cause more problems than anyone in Zhongnanhai lets on.

How to know if the Trump administration is serious?

More than anything, look to see if the US government imposes a reciprocal standard on Chinese investment into the US – prohibiting it unless US companies can do the same thing in China. And if it makes full use of ‘national security’ authority to further vet and limit Chinese investments – and also US investment and businesses going into China – it is on the right track.

One wishes the Administration had rounded up some international allies before pulling the trigger – though as often happens, America’s friends perhaps stood back, hoping the Americans will go first and do the hard work.

Importantly, to be taken seriously on trade, USG needs to also apply pressure elsewhere: For example, 30-day inspections of Chinese ships and goods entering US ports are in order owing to safety and counterfeiting concerns. Such careful examinations are also necessary to search for opioids – the vast majority of which originate in China and are causing an epidemic in the United States, and killing more Americans than died at the height of the Vietnam War. The PRC claims it can’t stop the flow, so the Americans can help them.

The US Government might also finally enforce US securities laws. Start de-listing Chinese companies that won’t reveal their real financial information or are selling counterfeit goods. Wall Street and law firms will whine, but that’s nothing new. It is also helpful if USG seriously tackles Chinese cyber attacks and theft. Expose, shame, and sanction. And if the perpetrators are out of reach, sanction those ultimately responsible for letting them operate.

Aggressively sanction intellectual property theft and the strong-arming of technology from US companies in violation of WTO rules. The President has plenty of authority to do so.

Apply the same treatment to Chinese reporters in America as Western reporters receive in China.
And when Chinese officials come to the US and violate the law and threaten or kidnap other Chinese living in America, arrest them – even if the State Department gets the vapors. Quietly apply liens on the US properties and bank accounts of prominent Chinese officials and suspend their relatives’ ‘green cards.

If past practice is a guide, until the PRC has a reason to keep its promises on trade, it won’t. And until USG does the aforementioned China won’t have a reason – believing with some justification that the Americans won’t do anything.

Coordinating efforts

American efforts against PRC trade rule flouting have too often been scatterbrained. One observer commented: “It would be a great improvement if we simply coordinated the USG efforts under a common strategy and understanding. Instead we have contradictory efforts within the USG, if not the same department. Department of State demarches the PRC in the morning and gives its scientists a grant and visa in the afternoon.”

Even the US military is schizophrenic: It sends aircraft carriers into the South China Sea, and then when the Chinese steal a US Navy drone, harass American aircraft, and issue bloodcurdling threats against the US and its friends- the Americans invite the Chinese to the RIMPAC exercise. Not surprisingly, the Chinese doubt American staying power when it comes to trade pressure – and reckon Washington will always cave in.

How will the Trump administration fare? I don’t know. Against an adversary like China, one doesn’t get many chances, and it’s better to have stood up a decade ago.

The US side (both private sector and government) too often had a condescending attitude towards the PRC when it was weak and poor. Now that it’s much stronger and flush with cash, going from condescending to craven has been easy enough.

While not a blanket indictment, opinions on the PRC often correlate to whether someone is making money (or hope to make money – or even get a visa or seminar invitations) from the PRC. Or in some cases, it’s their reputation at stake after having invested in the accomodationist China policy that got us into the current mess.

The idea was that by accommodating China – and also letting it into WTO and ignoring its behavior, it would gradually play by the rules and even liberalize. This 45-year experiment long ago showed a flawed hypothesis. But how many people have publicly admitted they were wrong about China? Michael Pillsbury comes to mind. Besides him it’s hard to recall anyone.

But, it’s often argued, trade has nothing to do with political differences between countries. Read any of the analysis and commentary on the Chinese economy – or even broader relations and there’s rarely any mention of the lack of consensual government, organ harvesting, an Orwellian surveillance state that hounds, kidnaps, and kills opponents, herds Uighurs into ‘education’ camps, persecutes Christians, and flouts international law. Indeed, overlooking this sort of thing is often considered nuanced and statesmanlike.

I would argue that principles do still matter. Or at least they did when it was the South African apartheid regime under the gun – and that in many respects was more liberal than the current PRC regime.

Perhaps to help American businessmen and academics recalibrate their thinking about China, the Trump administration can create a PRC-tailored version of the Sullivan Principles or sanctions used against South Africa.

Sadly, there’s never been a country more welcome into the civilized world. But the best chance to ‘transform’ China was to withhold WTO entry until China changed; setting the rules and requiring the PRC to adjust – not vice versa.

The PRC is predictably riled up over Mr. Trump’s actions. An article in the Global Times recently threatened China will fight the trade war like it did the Korean War. If only. As one observer commented: “For once, I agree with a Global Times op-ed. The PRC should fight the trade war the way they did the Korean War:

— Refuse to acknowledge responsibility; say it just “broke out”

— Get slaughtered on an industrial scale

— End up right where you started, but with the West having a renewed determination for pushing back

— Declare victory for having “stood up” (no need to explain what that means)

— Use big forward leaps and a revolution in culture as a force multiplier to deepen the self-humiliation, until the whole world is wondering what sickness is it that perpetually afflicts China.

— Spend the next three decades in penury recovering

— Fabricate history and lionize the national leader that created the mess.

While this can all seem depressing, look beyond tariffs, sanctions and claims – even from some US pundits and Ms. Legarde at the IMF – that the PRC model is the wave of the future. Instead, keep the Chinese ‘futures market’ in mind – whereby successful Chinese want to put their money and themselves into the United States – or somewhere like it. This reflects the attractiveness and strength of the USA as a market and a society.

When every American who can is moving their money into the PRC and angling for a residence permit, while overpaying for a Beijing condo, then I’ll be worried. Until then, one hopes Mr. Trump continues to stand up for the rules that have worked well for a long time – and from which China would have benefited even more if it had followed them.