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There Is Nothing “Free” About Our Trade With China

Irwin M. Stelzer

When President Trump talks tough on trade to one or several of our “partners,” he is being rude and wrecking the world trading system—in the words of the New York Times, adopting a “starkly unilateralist approach.” Yet when he politely raises America’s problems with that system in private, praises his hosts for their economic progress, and tells them our problems are not their fault, but the fault of the inept negotiators that found so many jobs in prior administrations, he “Bets on Flattery.” Fortunately, the president long ago gave up trying to please the Gray Lady.

Start with the usual, designedly misleading numbers released to the press after each meeting on his recent China trip—a list of “deals” that supposedly will bring millions into the coffers of American firms. There’s a loudly trumpeted deal for Chinese companies to purchase $12 billion worth of chips for smartphones (which extends over three years and in reality is about in line with the existing level of purchases). There’s the $20 billion of Chinese investments in chemicals and shale gas in West Virginia (which is to extend over 20 years). There’s a contract for the announced $43 billion in investment in Alaska (that has yet to be negotiated). In short, none of these face-saving, so-called deals—even if consummated—will do much to reduce the current $347 billion-and-growing goods trade deficit we run with China. Only a major change in the rules of the game can do that.

Move on to the charge that Trump is exploding the current world trading system. To which the most appropriate comment is, “About time.” Some day a wise political analyst/psychiatrist will figure out why prior administrations negotiated from a position of weakness, whether with China on trade, Iran on its nuclear program, or Mexico on the meaning of “North American content” enshrined in NAFTA. The attitude seems to have been that any deal is better than no deal, that no deal is a failure, but any deal can be dressed up to look like a win when reported in a pro-administration press.

Here is the trading system now in place with China, a system Xi Jinping characterizes as globalist and based on free trade. American firms can have access to China’s market only if they agree to turn over their intellectual property to a Chinese “partner,” a company that ere long will go it alone, building scale economies thanks to rules that require Chinese companies to buy from it rather than foreigners. If American firms want to take advantage of China’s recently-very-limited opening of its financial markets they must buy Chinese-made telecommunications equipment, and store financial data on customers in China. If American firms want to sell cars in China they must manufacture them there with a Chinese partner, or pay a 25 percent duty plus other taxes on imported cars; the U.S. tariff is 2.5 percent.

Chinese companies in industries of the future don’t have to rely solely on the billions they steal in IP from the U.S. every year (at an annual cost to others of between $225 billion and $600 billion, according to a Commission established by the National Bureau of Asian Research). They also enjoy large subsidies from the state, and a domestic market ring-fenced to protect them from foreign competition until they achieve sufficient scale to dominate international markets.

James Andrew Lewis, senior vice president of the Center for Strategic & International Studies, sums it up this way: “Subsidized Chinese companies operating from a closed domestic market and selling to an open international market have an immense advantage.” Michael Schuman, writing in Bloomberg BusinessWeek adds, “In industries of the future ranging from robotics to electric cars, often backed by a torrent of state aid, the goal is ultimately to squeeze foreign companies out of the gargantuan Chinese market, then use it as a launchpad for Chinese powerhouses to expand and compete globally.”

And if all of that doesn’t wipe out overseas competition and swell China’s trade surplus with the United States, there is always the yuan to be manipulated. If that is the system Trump’s critics want to preserve, they at least should not call it “free trade” or “globalization.”

Of course, there is more to trade than the rules of the road, or of the sea lanes. Trump favors open access to all the sea lanes of the South China Sea; China is warning its trading partners away from lanes surrounding the islands it has constructed and militarized.

Those who have visceral negative reactions to whatever Trump proposes, should ask themselves the following questions. Am I in favor of a trading regime that:

Allows China to steal our intellectual property?

Requires American firms to turn over their intellectual property as a condition of access to China’s markets?

Requires China’s companies to favor Chinese over American suppliers?

Permits the Chinese government to lavish subsidies on growth industries of the future to enable them to undercut American firms in our domestic and in international markets?

If your answers are “yes,” then opposition to Trump’s trade policy is for you. If “no,” then at least on this issue you favor the president’s policy of attempting to bring down the rigged trade system, and agree with the president’s statement in Beijing that “We really have to look at access, forced technology transfer and the theft of intellectual property.” Because failure to do so in the past has contributed to the hollowing out of our 20th century industries and continued failure to do so is already contributing to the hollowing out of our 21st century industrial sector. That would be irresponsible, and the last thing we need now is an irresponsible president.

If the president follows through on his trade agenda, ignoring Xi’s unkept promises to reign in Kim Jong-un in return for continued permission to operate an unfair trading system, will that upset current patterns of world trade? Will it disrupt current international supply systems? Will it drive up the price of some imported goods?

Of course, any new, less rigged system would do just that. Is that a bad thing for the American economy? Surely not. The American Revolution did all of those things, so did Lincoln’s war to end slavery, so did our post-World War II upset of Britain’s system of imperial preference that froze us out of so many markets. If Trump’s policy is “starkly unilateralist,” so be it.

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