The Trade War with China: What’s America’s Beef?*

The Trade War with China: What’s America’s Beef?

Some have argued that the Trump Administration’s tariffs against China are overdone, a flexing of unnecessary economic muscle for internal U.S. political purposes. That’s not the reality. China’s anti-World Trade Organization actions are illegal immoral mercantilist textbook examples of economic predation (not that there’s anything wrong with economic predation … except, of course, if you’re on the receiving end – it’s a normal function of an open capitalist economic system). That predation may call for firm countermeasures, raising the question of whether America has the stomach for a painful, protracted trade war against China. China apparently believes it doesn’t.

The February 2019 US Trade Representative’s Report on China’s WTO Compliance includes a number of specifics that illustrate a pattern of Chinese government-directed economic protectionism. The following are several of the high points:

  • China permits foreign automobile manufacturers to operate in China only through joint ventures with Chinese companies. Since none of these joint ventures can be majority foreign-owned, foreign automobile manufacturers are required to transfer core technologies to their Chinese partners.
  • China provides massive government subsidies to national champions and shields those subsidies from scrutiny. This contributes to serious excess capacity that, among a variety of sectors, impacts the steel, aluminum, solar panel and fishing industries.
  • China does not provide adequate intellectual property rights enforcement against copyright infringement.
  • China prohibits foreign companies from directly providing cloud computing services, including internet-provided computer data and storage services and software application services. Because of the effective impossibility of providing these services on a cross-border basis (due to the Great Internet Wall), the only option a foreign service supplier has to access the Chinese market is to partner with a Chinese company that holds the necessary Internet data center license. Doing so requires it to turn over its technology.
  • China imposes export restrictions on numerous strategic raw materials.
  • China blocks US suppliers such as Visa and MasterCard from its market even though it committed to open that market to foreign suppliers by 2006, and despite a WTO dispute settlement panel confirming this commitment. China’s objective is to protect its national champion, China Union Pay, from competition in China so that it can use the revenues from a captive domestic market to fund its own global expansion.
  • China’s practice is to launch antidumping and countervailing duty investigations that discourage its trading partners from exercising their rights under WTO rules. The U.S. prevailed in the three WTO cases in which it challenged duties imposed by China, and China failed to comply with the WTO’s rulings, which forced the U.S. to bring international compliance proceedings.
  • China has not updated its Harmonized System (HS) 2002 tariff schedule. Although WTO members approved a final HS 2002 tariff schedule for China in March 2017 after 12 years of negotiation, China continues to withhold its schedule for certification, claiming that its domestic approval process, which so far has lasted 18 months, is not yet completed. This is one reason why WTO members do not have accurate, current information on all of China’s tariffs.
  • Key legal institutions, including the courts, are structured to respond to the Communist Party’s directions in all domestic disputes.

As the summary of the US Trade Representative’s Report on China’s WTO Compliance makes clear, China has pursued, and continues to pursue, a comprehensive mercantilist strategy. China’s pursuit of an all-fronts economic war is designed, over time, to achieve global economic dominance … and China has not concealed that goal (see, for example, “Made in China 2025,” a Chinese government plan adopted in 2015 to make China competitive preeminent in a wide range of high-tech fields). President Trump has imposed tariffs, and proposed further tariffs, that may or may not be sufficient for America to win that war.

In a number of ways, China in early 2019 can be analogized to Germany in early 1939 – both China and Germany spent years building their arsenals resources and positioning themselves for economic military war. The U.S. may be viewed in some ways like the UK before WWII – warned about the rising military economic power of its closest adversary and aware of the military economic inroads being made, but largely ignoring them. Today’s contest between China and the U.S. is not yet a military one; 2019 is not 1939. History is not repeating itself. But it may be rhyming. And it certainly is resonating.

China is waging an economic campaign that it began some years ago. The fact that the U.S. is the global military and economic hegemon has led many to believe that any war with China will be one-sided, the outcome not in doubt. However, the History of War teaches that underestimating an enemy can be fatal. Once attacked, countermeasures become necessary and those countermeasures by the U.S., if its goal is to win that war, should be overwhelming. Ensuring an American victory would require the U.S. to make full, rather than partial, use of its arsenal of legal, economic and foreign policy weapons and enlist a powerful spectrum of global allies (including Japan, South Korea, Germany, Canada, Mexico, and the UK) who sign onto a coordinated strategy. In addition to a long-term, comprehensive tariff-and-trade strategy, such a plan at the least should (1) pressure China through the World Trade Organization by engaging in a broad range of internationally-based legal actions to address each of China’s violations of WTO rules, (2) amend American and allied countries’ laws to inhibit Chinese national champions that currently are immune from lawsuits and enforcement actions from acquiring influential interests in U.S. and allied countries’ businesses and companies (an expansion of the American government’s recent actions against Huawei), (3) reform American antitrust laws to eliminate the exemption for lawsuits and enforcement actions against sovereign countries the businesses of which are subject to State Control, (4) deny visas to Chinese nationals who might utilize access to the U.S. or its allies as an opportunity to steal acquire valuable intellectual property, knowhow and/or trade secrets, (5) and grant visas and educational exchanges with allies that strengthen the group’s joint actions and their aggregate intellectual and educational resources.

China has created a myth argument story to explain its success and, more importantly, to impress on others the inevitability of its rise to become the global hegemon. Because of its size, resources and history, China paints itself as an irresistible force, making the further point that those who side with it will be richly rewarded. As part of that story, China pursues a protectionist, mercantilist agenda, building dependencies through loans that finance important local infrastructure (for example, in Sri Lanka, Zambia, Djibouti and Kenya), cementing trade agreements (for example, with Australia) and economic alliances (for example, through its Belt and Road Initiative), stockpiling strategic materials (including rare earths produced domestically) and equity interests in projects acquired by national champions in Asia, Africa and the Americas, and aligning itself with America’s enemies (including Russia, Iran and Venezuela). These together with China’s holdings of U.S. Treasury securities provide China with a level of insulation protection against potential American countermeasures.

Confronting China with overwhelming force has not yet been America’s response to China’s pursuit of all-out economic war. History will be the judge of whether this was America’s best response.

Finally (from a good friend)

How the fight started:

One year, I decided to buy my mother-in-law a cemetery plot as a Christmas gift. The next year, I didn’t buy her a gift. When she asked me why, I replied, “Well, you still haven’t used the gift I bought you last year!” And that’s how the fight started….

My wife and I were watching Who Wants To Be A Millionaire while we were in bed. I turned to her and said, “Do you want to have Sex?” “No,” she answered. I then said, “Is that your final answer?” She didn’t even look at me this time, simply saying, “Yes.” So I said, “Then I’d like to phone a friend.” And that’s when the fight started….

I took my wife to a restaurant. The waiter, for some reason, took my order first. “I’ll have the rump steak, rare, please.” He said, “Aren’t you worried about the mad cow?” “Nah, she can order for herself.” And that’s when the fight started….

My wife and I were sitting at a table at her high school reunion, and she kept staring at a drunken man swigging his drink as he sat alone at a nearby table. I asked her, “Do you know him?” “Yes,” she sighed, “He’s an old boyfriend. I understand he took to drinking right after we split up those many years ago, and I hear he hasn’t been sober since.” “My God!” I said, “Who would think a person could go on celebrating that long?” And then the fight started….

When our lawn mower broke and wouldn’t run, my wife kept hinting to me that I should get it fixed. But somehow I always had something else to take care of first, the shed, the boat, making beer. Always something more important to me. Finally she thought of a clever way to make her point. When I arrived home one day, I found her seated in the tall grass, busily snipping away with a tiny pair of sewing scissors. I watched silently for a short time and then went into the house. I was gone only a minute, and when I came out again I handed her a toothbrush. I said, “When you finish cutting the grass, you might as well sweep the driveway.” The doctors say I will walk again, but I will always have a limp.

[To be continued.]

*┬® Copyright 2019 by William Natbony. All rights reserved.

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