Following President Trump’s signing of a memorandum authorizing tariffs against Chinese steel and aluminum to which China President Xi responded in kind as anyone who’d been paying attention knew he would, the airwaves have been full of laments about an incipient trade war. As I’ve mentioned before that’s the equivalent of complaining that the Doolittle raid was starting a war in the Pacific. China has been in a trade war with the U. S. for more than 30 years, we haven’t responded, and the war has completely transformed the American economy, greatly exacerbating income inequality.
The pretext of these tariffs is Chinese “theft” of intellectual property, something I warned about 40 years ago sitting in the Honeywell boardroom. I’m not sure what anyone would expect China to do about intellectual property theft or, frankly, any of its other violations of international trade agreements to which it is signatory. China does not have a robust system of civil law or independent courts and no tradition of either. Imagine trying to enforce intellectual property law in the United States without a system of civil law.
Here’s are a few gentle suggestions on what China could and should do to mend relations with the United States, all things completely within its power:
- It could end state ownership of aluminum and steel-making companies or, at the very least, stop subsidizing them.
- It could make the operations of its banks more transparent and increase foreign ownership of its banks, as it agreed to as a condition of being admitted to the WTO.
- It could end the use of pirated software within the Chinese government.
- It could end the theft of intellectual property by state-owned Chinese pharmaceutical companies.
- It could end the theft of intellectual property by state-owned electronics companies, e.g. China Electronics Company.
That would be a start. Passing more laws which will never be enforced is not reform. It’s pretending to reform while conducting business as usual.
Here’s a list of things that should be pointed out.
(1) China and the Chinese government has a right to develop advanced domestic industries and technologies. That’s a legitimate desire of any government.
(2) The Chinese government can require as a price of access to Chinese consumers any number of conditions including the transfer of technology; it may not violate the letter of their WTO commitment as letter, but it violates the spirit.
(3) The WTO is not a shield. The WTO only works when every side is committed to trade that is beneficial to every side. Without that commitment, the WTO cannot compel any government to accept what it views as unfair trade.
(4) Its incumbent on foreign firms and foreign governments to decide if it is acceptable to trade on the terms the Chinese government demands, if not, don’t trade.
(5) The Chinese government should understand if you act like a robber, don’t be surprised if you get treated like a robber.
Finally, based on what the Chinese government has been trending for the last 4 years, its very unlikely they will take action on any of items on the list. The Chinese government has been tightening control of the economy, making the banks more opaque, requiring more transfer of intellectual property then before, etc.
At the same time, there are aspects of the relationship that are worth saving; so I have two proposals on what the Chinese government can do. They could (a) impose an export tariff, (b) require their exports to the US have a certain % of US components.
Just to be clear I think that the U. S. has erred in its trade relationship with China over the period of the last 40 years, through a combination of greed and paternalism on our part and guile on theirs. What should have happened is we should should have slowly developed an open and reciprocal relationship based on mutual respect and equality. We should have limited what we imported from China strictly to Chinese goods imports from the U. S. When China failed in its commitments for WTO admission it should have required a vote of the other members to retain China in the body. China is just too big for any other rubric to work. It’s like the old wisecrack about how you eat an elephant: one bite at a time.
Instead we’ve upset the apple cart. The U. S. economy looks very little as it did in 1978 and a lot of that is due to trade with China. A lot of people in the U. S. became very rich as a consequence but a lot more people got poorer.
The error was really after 1991 (end of Cold War) and especially after 1998 (Asian financial crisis). Maybe 2009 (google’s expulsion) was another inflection point.
Before 1998 trade with China was too small to matter. 2009 was when it was clear that the CCP could never satisfy their WTO commitments.
But better late then never.