(What’s Left of) Our Economy: Let’s Get Real When Criticizing Trump’s China Trade Deal

Tags

Charles Schumer, China, dispute resolution, enforcement, Made in China 2025, Phase One, rule of law, tariffs, Trade, trade deal, {What's Left of) Our Economy

Of all the desperation- and Trump Derangement Syndrome-fueled arguments used to disparage the President’s new “Phase One” trade deal with China, one stands out as especially silly. It’s the complaint that the agreement hasn’t secured Beijing’s agreement to change its laws permitting the various predatory trade and broader predatory commercial practices that China is using to seize world leadership in key advanced industries and technologies, or otherwise promise verifiably to halt them. (Senate Democratic leader Charles Schumer of New York has been particularly outspoken on this point.)

And the complaint isn’t silly simply because the very title of the deal – Phase One – makes completely clear that it was never meant to once and for all solve all the grave problems that Chinese predation has created. It’s mainly silly for two reasons. First, the absence of anything remotely resembling rule of law in China means that Chinese promises to change laws and regulations and even actions to change what’s on paper could not be less important.

For China’s system is based on the arbitrary exercise of power  That is, by definition, its dictators and the bureaucracies they run feel absolutely no obligation to adhere to whatever text happens to be on paper at a given moment. In fact, one of the main purposes of publishing these fake measures is to keep outsiders ignorant of the practices both of the central government and of the various layers of sub-national government – i.e., the situation on the ground, and what needs to be done to become or remain viable in China.

Second, thanks to Phase One’s actual terms, whether the Chinese do or don’t change their laws, and even their practices, matters little now. That’s because the stiff remaining tariffs on massive amounts of Chinese goods intended for American customers effectively deny Beijing the ability to turn its technology extortion into advantages in the U.S. market – the market it needs to access and dominate in order to realize its ambitions. Indeed, the highest remaining tariffs (25 percent) penalize the very high value products targeted by the Made in China 2025 program that’s carrying out Beijing’s plans.

Moreover Phase One’s dispute-resolution and enforcement system – which ingeniously and crucially establishes a de facto American last word – goes far toward preventing China from using Made in China 2025 to turn its predation into advantages in the China’s own large market, either. If it makes the attempt, American victims can take their cases to the Washington, which enjoys broad authority under the deal to hike duties on key Chinese products even higher – and without fear of tit-for-tat Chinese retaliation. China’s only legal option is pulling out of agreement entirely – which given its continuing heavy reliance on accessing the American market, would amount to cutting off more than its nose to spite its face.

Thoughtful criticisms of Phase One have come from some quarters. Further, as I wrote in my initial assessment of the dispute-resolution system, realizing its benefits for the United States will require American leaders to show major poker-playing skills – which shouldn’t be taken for granted under the Trump administration, let alone under future Presidents. Neither development is guaranteed. But Phase One critics genuinely seeking to make certain that it works for the United States should focus on identifying actual weaknesses rather than trying to portray successes as failures.

(What’s Left of) Our Economy: Why Trump Should Have Hung Tough with China

Tags

Applied Materials, ASM Lithography, Bloomberg, Bloomberg.com, China, electronics, forced technology transfer, Fujian Jinhua, G20 Summit, information technology hardware, intellectual property theft, KLA-Tencor, Lam Research, Made in China 2025, Micron Technology, Netherlands, semiconductors, Taiwan, technology, Trade, trade war, Trump, United Microelectronics Corporation, Xi JInPing, ZTE, {What's Left of) Our Economy

A U.S.-China summit on the sidelines of the global economic conference in Buenos Aires has produced what amounts to a three-month truce in the trade conflict the two countries have been waging since the early months of the Trump administration. I’ll have a detailed reaction coming out in a major newspaper op-ed piece tomorrow, so I don’t want to steal my own thunder here.

For now, it’s worth spotlighting a recent Bloomberg.com piece on America’s latest efforts to fight China’s intellectual property theft, and the dangerous progress and ambitions it’s been largely fueling. It’s so good, and so important, that it illustrates exactly why the President should have hung tough in his China trade diplomacy – and how much more thoroughly America’s China policies need overhauling before they can adequately serve U.S. national interests than even the Trump administration has been indicating.

Just to review, the Trump administration has imposed several rounds of tariffs on literally hundreds of billions of Chinese products typically headed for the American market, largely in response to China’s newly explicit ambition to achieve worldwide technological supremacy – and in the process become the world’s strongest economy and military power.

This Chinese goal – made clear in a program called Made in China 2025 – is anything but entirely new. Indeed, much of the blueprint has been in effect literally for many years, and certainly once Chinese leaders realized that the United States, Japan, South Korea, Taiwan, and Western Europe seemed happy enough to foster their country’s economic development by supplying in various ways the knowhow to make major tech catch-up a realistic goal. So China has long sought to secure such technology as fast as possible, by whatever means were needed – including those that violated various trade commitments it had made.

In the last few years, however, China’s often startling resulting advances, its reversion to a national economic strategy ever more reliant on government dictates and strong-arming and discriminating against foreign investors, and its mounting belligerence in world affairs, have woken up even many pillars of America’s free trade-happy establishment to the threat they’d been creating. And crucially, the crestfallen included many of the very companies that were handing over their crown jewels to China, along with the politicians and think tank shills they funded.

The Bloomberg article is so valuable because in one fell swoop, it illustrates how deeply involved American companies have been involved – and remain – in strengthening China’s tech capabilities, how consequently vulnerable China remains to American inputs of various kinds, and therefore why there is absolutely no reason for the Trump administration to relieve its tariffs’ pressures on China’s economy without major – and completely verifiable – concessions from Beijing.

In the piece, a team of Bloomberg reporters make all these points with a detailed account of a Chinese (government-supported, of course) entity that sought to produce advanced versions of critical pieces of the semiconductors used in smartphones. The explicit goal: Reduce the Chinese electronics’ industry’s dependence on foreign semiconductors.

That objective per se is highly objectionable – that is, for anyone who takes seriously the supposed main purpose of the global trade system, which is to foster the most efficient possible global division of labor by freeing up trade flows to ensure that the output and provision of various products and services is concentrated in those countries that do these jobs best. But defenders of the global trade status quo never seemed to notice that China demonstrated no interest in passively accepting the verdict of market forces.

In fact, as the Bloomberg team makes clear, American technology companies have been all too ready to aid this Chinese ambition, even with Beijing’s ambitions ringing more and more alarm bells. Specifically, this Chinese entity (as usual, I refuse to call these outfits “companies” or “businesses” because Beijing’s effective control over them sharply distinguishes them from groupings in largely free market economy that actually deserve those labels), was being supplied by U.S. semiconductor manufacturing equipment firms KLA-Tencor, Applied Materials, and Lam Research – along with foreign counterparts like the Netherlands’ ASM Lithography and Taiwan’s United Microelectronics Corp.

But at the end of October, the U.S. government placed the Chinese entity – called Fujian Jinhua Integrated Circuits – on a list of economic actors whose operations are just to pose “significant risk of becoming involved in activities that are contrary to the national interest of the United States.” Several days later, Washington also indicted the entity for stealing the intellectual property of American semiconductor firm Micron Technology of stealing its intellectual property. As a result of the national security finding, American companies are in effect prohibited from supplying Fujian Jinhua. And since Fujian’s non-U.S. suppliers sell it goods that contain American-made parts, the restrictions cover them, too.

The result of the ban announcement? According to the Bloomberg article, Fujian Jinhua’s “dream is now in tatters with consultants from American suppliers gone, the factories silent and workers rattled.” And lest you think this is just one anecdote, recall that a similar American export ban on selling to Chinese telecommunications manufacturer ZTE would have doomed that entity had President Trump not let it off the hook in hopes of currying some valuable favor and negotiating leverage (so far, in vain) with Chinese leader Xi Jinping.

In other words, the United States enjoys decisive leverage over China in the struggle for technological, economic, and military power, and should continue ramping it up to extract whatever concessions it can get from Beijing. In this vein, it’s as shocking as it is disturbing that U.S. tech firms like those mentioned above are still allowed to contribute to China’s technological development months after the Trump administration has literally designated China as a power (along with Russia) that is challenging “American power, influence, and interests, [and] attempting to erode American security and prosperity.” Further, the same national security strategy document declared, more specifically, that “Part of China’s military modernization and economic expansion is due to its access to the U.S. innovation economy, including America’s world-class universities.”

But more important, as I’ve written, since verifiable concessions are so unlikely, this pressure should form one major element of a larger strategy that to disengage America from China economically, and this goal, and the stakes that justify it, should be declared by President Trump soon after his return from Buenos Aires.

(What’s Left of) Our Economy: America’s Persistent China Delusion Syndrome

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agriculture, China, comparative advantage, establishment, Made in China 2025, Mainstream Media, offshoring lobby, private sector, tariffs, The New York Times, The Wall Street Journal, Trade, {What's Left of) Our Economy

The week has barely started and already the Mainstream Media have delivered some genuinely bizarre – indeed seemingly clueless – China-related moments.

There’s the big New York Times series titled “China Rules.” It usefully describes how the People’s Republic has completely confounded the bipartisan American political and policy establishment’s confidence that its growing integration into the global economy would turn it into more cooperative, more economically and politically open power. And thankfully, the series does point out this mistaken official U.S. optimism – which it notes spanned fully eight presidencies. But it says nothing about the massive amounts of money spent by offshoring multinational corporations in Washington, D.C. and the rest of the country’s political and policy communities (encompassing academia and think tanks alike) to foster China myth-making and spoon-feed it to the national media, which overwhelmingly swallowed it hook, line, and sinker.

Given that this self-interested myth-making bears so much blame for China’s emergence as a major threat to America’s national security and prosperity, it’s imperative that The Times (and the rest of the Mainstream Media) start telling this story in detail – both to reveal how active and influential the myth-makers remain, and to reduce the odds that they’ll stage a comeback down the road.

The Times itself just provided one clear example of such influence in a tweet this morning about a piece on the just-concluded summit of Asia Pacific countries in Papua New Guinea – which tells readers that “The Chinese delegation sought to reaffirm its opposition to the protectionism and unilateralism that have been a focal point for criticism of the United States.” Honestly. “Reaffirm”? Like China’s (stated) opposition to protectionism as such is something to be taken seriously? Or that even China takes seriously?

Are such longstanding journalistic conventions the product of simple laziness? Or of literally decades of media reliance for information and analysis on myth-makers with strong vested stakes in portraying China as a steadily reforming economy? The answer, of course, is “both” – and that the latter fosters the former.

Another example of these habits’ persistence: today’s Wall Street Journal article describing how China’s central government and major local governments are now trying to support a “private sector” that “has become a weak link in a slowing economy.” Yes, there are entities in China that are now customarily called “private sector.” But in a command economy like China’s, where the state wields power in a wide variety of direct and indirect ways, they have about as much in common with genuine private sector companies as fool’s gold has with the real thing.

But perhaps the week’s most important China media reference – at least so far – appeared in a Journal article on how the country’s farm sector is coping with the advent of high tariffs on many U.S. agricultural products. It came in the form of some statements made by China’s President, Xi Jinping that deserve major coverage on their own, but that were presented as little more than boilerplate:

“Unilateralism and trade protectionism are rising, forcing us to take the road of self reliance. This is not a bad thing. China ultimately depends on itself.”

Xi was speaking specifically about agriculture, and can’t reasonably be criticized for wanting his country to be more self-sufficient in this sector. After all, what national leader could genuinely be happy about depending on other countries for food?

But there are two glaring problems brought up by his remarks. First, as I’ve written frequently, the contemporary global trading system, and the conventional economics underlying it, condemn the quest for self-sufficiency in any part of a country’s economy as a No-No. Trade (and therefore production) patterns are supposed to help develop the most efficient global division of labor possible. In plain English, this means that countries are supposed to specialize in what they make best, and to remain satisfied with importing most of the rest. And if food production isn’t their strong suit, they should be confident that they’ll always be able to buy from abroad all that they need.

Second, as I’ve also written, China’s quest for self-sufficiency is hardly confined to food. The country’s policy record makes clear that it’s the goal for its entire economy. The regime’s Made in China 2025 manufacturing and technology program is only the latest example. Among its objectives is reducing the country’s dependence on foreign-made parts, components, and materials for a wide range of manufactures. In other words, China’s leaders aren’t satisfied with importing goods and services where it currently lacks what economists call “comparative advantage.” They want to create this advantage for China – and according to a very specific schedule of highly concrete goals.

Whether dealing with another party, it’s crucial to define it correctly, and doubly so when that party is a “competitor” or a “rival” or outright enemy. Thanks to articles like those above, Americans have just been reminded vividly how far much of their leadership class remains from achieving this objective when it comes to China.

Making News: A USAToday Op-Ed on Trump & Trade, & a New National Radio Podcast on the China Tech Threat

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CFIUS, China, FDI, Made in China 2025, Making News, national security, tariffs, technology, The John Batchelor Show, Trade, Trump, USAToday

I’m pleased to announce that USAToday has just published my latest op-ed article — a piece arguing that President Trump is exactly right to believe that the United States has ample clout to prevail in trade conflicts with foreign economies. Read it at this link.

Incidentally, this article ran as a solicited rejoinder to a USAToday editorial criticizing Mr. Trump’s trade policies. As I’ve written before, the newspaper deserves great credit for its regular practice of letting readers know that there are (at least) two sides to every story.

Also the podcast is now on-line of my interview last night on John Batchelor’s nationally syndicated radio show. Click here for an information-packed discussion about the latest developments in the U.S.-China competition to control industries and technologies vital for national security and prosperity.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: CNBC Interview Now On-Line, Plus Background Info & Context

Tags

China, CNBC, Made in China 2025, North Korea, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

I’m pleased to announce that the video is now on-line of my interview yesterday on CNBC on President Trump’s new announced tariffs on imports from China. Click here to see it.

As is usually the case, though, the segment was way too short to deal with all the aspects and angles of this decision that deserve attention. So here’s some material I prepared for the segment producer at her request the night before the broadcast. Sharp-eyed RealityChek regulars will find some of these points familiar, but to me, that just goes to show that many of the questions that have surrounded Mr. Trump’s trade policies since his inauguration remain either completely unanswered, or largely unanswered – as do many of the potential pluses and minuses. These talking points are as follows: 

“1. Although the White House may announce the tariff list tomorrow, it remains far from certain that all, or any, of them will actually be imposed. The Section 301 law providing their statutory basis permits the U.S. Trade Rep’s office 30 days to put them in place after the order formally appears in the Federal Register. In addition, the President could delay the duties up to 180 more days (i.e., after the midterm elections) if he determines that significant progress is being made in trade talks with China, or that the delay would encourage such progress.

“2. Less formally, these windows could enable the President to delay the tariffs’ imposition in order to encourage China to remain cooperative on the North Korea crisis. Mr. Trump has most recently declared his determination to go ahead with the tariffs despite acknowledging China’s help vis-a-vis Kim Jong Un, but at times in the past, he’s linked decisions to ease up or postpone such tariff decisions because of China’s purportedly cooperative attitude. And on a related issue, just before his summit with Kim, he explicitly called his decision to lift the “death penalty” on China telecoms firm ZTE a favor to Chinese leader Xi Jinping.

“3. I personally believe that any linkage between China trade policy and North Korea policy would be a serious mistake, as it assumes that Beijing is helping the United States defuse tensions on the peninsula as an act of charity, rather than a course of action that is squarely in China’s interest. As a result, linkage could reward China for taking steps it would have taken anyway.

“4. The President deserves major credit for recognizing that diplomacy and engagement alone have not sufficed to stem the economic and national security threats presented by China’s wide array of predatory trade and investment policies, exemplified most recently by its Made in China 2025 programs.

“5. In particular, Mr. Trump has recognized that U.S. allies are simply not serious about making significant contributions to a multilateral effort to combat China’s trade and broader economic predation. Similarly, he understands that the WTO is completely inadequate to this task, and that unilateral American action has long been essential.

“6. But his policies can be faulted in several respects.

“a. Some of his China-related goals seem flatly contradictory. Chiefly, the President says he wants to reduce the massive bilateral trade deficit America runs with China. But he also wants China to reduce its recent harassment of U.S. and other foreign companies and make it easier for them to do business in China. If the Chinese agree on the latter, much of the increased American (and other) corporate investment in China will wind up producing goods for export to the United States, thereby increasing the deficit.

“b. Tariffs on imports from China, all else equal, could well reduce the bilateral trade imbalance – especially if China opens its markets wider to U.S. exports, too. But the impact could be limited because shipments from other countries are likely to fill the gap to some extent.

“c. In addition, Mr. Trump should be paying more attention to the makeup of the trade deficit. In this regard, he has (erroneously) indicated that he would satisfied to see stepped up American exports of farm and energy products to accomplish much and even most of the deficit-reduction goal. But it’s much more important to narrow the gap in high value manufacturing industries, which make a much greater contribution to the American economy.

“d. The President is going to remain under attack on the tariff front from industries and sectors of the economy that might suffer losses, and these criticisms could well undercut GOP candidates in the upcoming midterm elections. He will also be criticized for taking measures the increase consumer prices. He could have preempted many of these criticisms in two main ways:

“First, earlier in his term, he should have strongly backed the border adjustment tax contained in the original Republican tax bill. This measure would have in effect both imposed a 20 percent tariff on imports and given a 20 percent subsidy to American exports. And since it would have been across-the-board, it would have provided protection and subsidies for both producers of finished goods (e.g., steel- and aluminum-using industries), and of the inputs for these finished goods.

“Second, he should be doing a much better job of persuading the American people that any change as disruptive as the new trade policies he’s begun to put into effect are bound to entail some short-term costs and sacrifices, but that the long-term benefits are well worth the candle. Tweets are not nearly enough. He needs a full-court PR press – Oval Office speeches, rallies, town hall meetings, the works.”

Another important point I wasn’t able to make: It’s true that, as the anchors and the other guest maintained, most economists think that trade deficits don’t matter to the health of a national economy. But as explained in the post linked here, this claim dangerously overlooks how trade deficits, and especially their increase, inevitably worsen the quality of the economy’s growth and makeup, and weaken the foundations of sustainable prosperity.    

 

(What’s Left of) Our Economy: On Those Latest Trump Tariffs

Tags

aluminum, border adjustment tax, China, European Union, FDI, foreign direct investment, intellectual property theft, Made in China 2025, metals, overcapacity, steel, subsidies, tariffs, tax reform, Trade, Trump, value-added tax, {What's Left of) Our Economy

Never let a good set of talking points go to waste! Earlier this morning, one of the broadcast networks asked if I was available for a segment on the latest Trump administration tariff announcements, and wanted to get an idea of where I came down. Even as I was typing up the following, though, I was told that the plan had changed, and that the program in question had decided to go with a Member of Congress instead.

Yet since they’re still relevant to this latest phase of U.S. trade policy, I thought you might find them useful in this slightly edited form.

1.  If the Europeans and other major economies retaliate vs the new U.S. steel and aluminum tariffs, they’ll make clear their indifference to the government-subsidized Chinese output has flooded global markets with both these metals, and seriously distorted trade flows.  In recent years, these foreign governments have paid lip service to the need to curb Chinese overcapacity, but many have enabled it by transshipping Chinese metals (mainly steel) to the US market or stepping up their own exports to the US to relieve the pressure China has put on their own producers.

2.  As a result, (as I’ve previously documented) during the current global economic recovery, the US is the only major steel producing country that has seen its share of world output fall significantly. 

3. Moreover, (as I’ve also shown), the higher input costs resulting from the new metals and other tariffs pale beside the benefits recently received by U.S.-based businesses (including metals users) due to tax reform and regulatory relief.

4. Re both the steel and China tariffs, I wish that Trump had backed a superior alternative:  the Border Adjustment Tax contained in the original version of the House GOP tax bill.

The BAT would have functioned like a value-added tax (a levy imposed by virtually every other country) — imposing a tax on imports heading for the U.S. market, and providing a subsidy for U.S. exports.  Since the BAT would have been across-the-board, no U.S. industry (e.g., metals-using manufacturers) could have argued that it was going to be disadvantaged because its products would have received the same benefits.

Moreover, the BAT was backed not only by House GOP leaders with staunch pro-free trade records.  It was also supported by many major multinational manufacturers.  In addition, it would have been perfectly legal under the WTO, since it so closely resembles the value-added taxes so many other countries have had in place for decades.  But President Trump – for reasons that remain unclear – never came on board.

5. In the absence of the BAT, though, the metals tariffs are essential for correcting major distortions in global trade flows caused by Chinese overcapacity, and the China-specific tariffs are essential for offsetting the impact of Chinese trade predation (including rampant intellectual property theft and extortion) on high tech industries, exemplified by the “Made in China 2025” program.

6. Nonetheless, re China specifically, I have criticized some of the Trump response as being internally inconsistent.  If for example the United States convinces the Chinese to treat U.S. companies operating in China more equitably, U.S. corporate investment in the PRC could well increase, and the trade deficit that Mr. Trump wants to shrink is likely to grow, as much US investment in China creates products exported to the US.

7. More generally, I’m deeply skeptical that any Chinese promises to halt or reduce these forms of protectionism can be verified — because the Chinese bureaucracy operates so secretively, the Chinese national manufacturing complex is so vast, and because the United States will never be able to send over to China enough officials to monitor compliance effectively.

8. As a result, rather than seeking to improve Chinese behavior, I believe U.S. policy toward the PRC should aim first and foremost to reduce the extensive linkages between the two economies.  In this vein, ever more sweeping U.S. moves and proposals to curb Chinese direct investment in key industries in America is a good first step.

(What’s Left of) Our Economy: A New China Bill – & Trade Policy Realist? – Worth Watching

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China, currency manipulation, economic nationalism, Fair Trade with China Enforcement Act, foreign direct investment, Gang of Eight, Immigration, Made in China 2025, Marco Rubio, national security, Populism, Republicans, subsidies, tech transfer, Trade, trade law, Trump, {What's Left of) Our Economy

One of the biggest questions surrounding the future of the Republican Party, and in turn of American politics, is how many leading GOP politicians learn the main lessons of the Trump victory in 2016. In my view, these include the political appeal and real-world imperative of a nationalist approach to American economic policy, especially in the realms of international trade and immigration.

President Trump’s capture of even most of his party’s establishment on the latter could not be clearer. But signs of populism’s growing appeal are also emerging in the former, and one of the biggest has just come courtesy of Marco Rubio. In fact, legislation recently introduced by the Florida Republican and Trump rival for the 2016 GOP presidential nomination strongly indicates that, when it comes to the crucial issue of China, Rubio is out-Trumping Mr. Trump.

Rubio’s journey has been a far as it has been high-speed. His voting record on trade policy overall has been awful – at least from an economic nationalist/populist standpoint. In fact, according to the libertarian Cato Institute, the only blemishes on his record so far have come from his support for federal subsidies for sugar – a crop grown in his home state. As a result, in the fall of 2015, I dismissed him as a typical Republican pseudo-hawk on China.

That is, he talked tough about the need to confront China’s expansionism in the East Asia/Pacific region. But he seemed oblivious to how decades of American trade policy had showered the People’s Republic with literally trillions of dollars worth of hard currency, along with cutting-edge technology voluntarily transferred by, and extorted with impunity from, American companies. In other words, he did and said nothing about U.S. decisions that unmistakably had helped China become a formidable military as well as economic power.

Fast forward to this year, and what a change – at least on China. In addition to criticizing President Trump for backing away from his own Commerce Department’s initial decision to all-but shut down the Chinese telecoms firm ZTE for (repeat) sanctions busting, he’s just introduced legislation that represents the most comprehensive effort I’ve yet seen to deal holistically with the intertwined Chinese threats to America’s economy and national security.

Rubio’s “Fair Trade with China Enforcement Act” contains numerous important measures to staunch the flow of money and defense-related tech to China. (Here’s a summary from his office.) Provisions that represent major and needed advancements in America’s strategy are:

> a prohibition on the the voluntary corporate transfer of technology to a wide range of explicitly named technologies subsidized by the Chinese government, including in the Made in China 2025 program aiming to achieve Chinese predominance in numerous economically and militarily critical technologies. That is, Rubio recognizes that tech extortion (conditioning access to the Chinese market on a company’s willingness to share knowhow with Chinese partners) isn’t the only way that Beijing has been closing the tech gap with the United States. American companies seeking to curry favor with China on their own, or simply recognizing the importance of locating R&D and related activities in close proximity to their manufacturing, have also fueled China’s power.

> a requirement that U.S. trade law recognize that any Chinese product headed for the American market that’s from an industry mentioned in any Chinese document even related to the Made in China 2025 plan is ipso facto receiving subsidies the kinds of subsidies that these statutes consider illegal; and that this same body of trade law just as automatically assume that such goods are actually injuring or threatening to injure U.S.-based competitors when they enter the American market. Translation into plain English: Rubio’s bill would dramatically lower the bar for imposing tariffs on imports from China deemed to be unfairly traded. Which would be one heckuva lot of imports from China.

> a ban on investors from China owning more than fifty percent of any American company producing goods targeted by Made in China 2025 – which would restrict another major channel of tech transfer to China;

> and a new tax on Chinese investments in the United States – including levies on Chinese purchases of American Treasury debt. The latter measure, in particular, would discourage China from buying excessive levels of U.S. government debt, which keeps China’s yuan weak versus the American dollar and therefore helps to put U.S.-made goods at price disadvantages versus their Chinese made counterparts wherever they compete.

Incidentally, a proposal along these lines was first made, to my knowledge, by Raymond, Howard, and Jesse Richman in their 2008 book Trading Away our Future. So they deserve a big shout-out.

Rubio’s bill isn’t perfect. For example, it should be clear by now that any Chinese entity permitted to bid for American assets is tightly controlled by the Chinese government. Therefore, I would favor banning all such takeovers. Even if existing acquisitions were permitted, Washington would at least be freezing the Chinese state’s economic footprint in the United States, and thereby preventing ever more American businesses from having to compete with rivals whose operations have nothing to do with the free market values the nation rightly values.

In addition, Rubio’s bill says nothing about American tech companies’ growing predilection for investing in Chinese tech “start-ups” and similar entities. Some of these investments are surely extorted, but others seem to be voluntary. But since all of them can help strengthen China’s tech capabilities, they should be banned as well if the recipients have any connection with Made in China 2025.

Finally, Rubio still seems pretty comfortable with the rest of America’s longstanding trade liberalization policies except for the impact of the North American Free Trade Agreement (NAFTA) on Florida produce growers. 

At the same time, China policy inevitably shapes so much of trade policy that Rubio’s single-minded focus to date can’t reasonably be criticized. Further, he seems to understand that it’s not enough simply to introduce a bill. Rubio’s been taking it the next step by lobbying for it, and for related China policy changes, actively in the media – both broadcast and print. He still needs to show a willingness to buttonhole his colleagues actively – the most important form of Capitol Hill lobbying. But (paradoxically) his leadership on 2013’s decidedly non-nationalist or populist Gang of Eight immigration bill at least indicates he recognizes the importance of this test. 

I’ve often wondered whether American politics can produce a leader with both the populist leanings of an outsider and the insider-type institutional expertise and contacts needed to turn these impulses into actual change. Rubio’s China bill and the policy migration it represents looks like major grounds for optimism.       

Our So-Called Foreign Policy: North Korea, China, & the (Inevitable) Limits of Diplomacy

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agriculture, China, commodities, diplomacy, energy, Iran, Kim Jong Un, LIbya, Made in China 2025, manufacturing, Muammar el-Qaddafi, North Korea, nuclear weapons, Our So-Called Foreign Policy, Russia, Saddam Hussein, Saudi Arabia, South Korea, tariffs, technology, Trade, trade deficit, tripwire, Trump, Ukraine

Diplomacy has sure taken a beating these last few days. And revealingly, that looks like a good thing.

Let me explain: I have no problem whatever with countries trying to resolve their differences peacefully, through dialogue and compromise. But in the nuclear age, and especially after America’s Vietnam debacle, this age-old concept has turned into a foreign policy magic bullet in the United States – including among the nation’s bipartisan globalist establishment. So the collapse (for now) of plans for a summit between President Trump and North Korean dictator Kim Jong Un, and the failure so far of the President to make any headway in curbing China’s predatory trade practices, could be welcome developments. For these developments could remind Americans of diplomacy’s limits in promoting U.S. national interests (the overriding priority of the nation’s foreign policy), and how even on crucial issues of war and peace, it can be completely pointless and even dangerously distracting.

On North Korea, there have always been strong grounds for skepticism that negotiations could achieve America’s main objective – the complete elimination of Kim Jong Un’s nuclear weapons. It’s true that Kim has appeared more interested in economic reform than his father or grandfather – who preceded him in power. Therefore, in principle, he would be more responsive to economic carrots and sticks. On the one hand, he might be amenable to surrendering his arsenal in exchange for foreign investment and aid (along with security-related concessions from the United States like formal recognition of his regime, a peace treaty ending the decades-long state of war between Pyongyang and its enemies). On the other hand, he might be more concerned about the impact of the sanctions that President Trump has both broadened and intensified.

Yet it was always difficult to believe that Kim would prize any of these considerations above his regime’s defense against overseas threats, and for these purposes, nuclear weapons are hard to beat. As widely noted, he’s surely been impressed by the gruesome fates of fellow autocrats who gave up their nuclear hopes (Libya’s Muammar el-Qaddafi) or who hadn’t the chance to develop these weapons (Iran’s Saddam Hussein).

Further, Kim also is no doubt aware of a third recent example of a country paying heavily for signing away its nuclear weapon status: Ukraine. In 1994, that nation agreed to dismantle the large nuclear force stationed on its soil when it was part of the Soviet Union, and left there after the USSR’s demise. In return, it received security promises from the United States, the United Kingdom, and Russia that its territorial integrity would be respected. A quarter century later, Moscow has seized effective control over much of the country’s eastern half.

Moreover, if a Trump-Kim summit and follow-on negotiations resulted in a compromise that left the North with some kind of nuclear arsenal, this “victory” could eventually become disastrous for America and its homeland. For there would be no guarantee that Kim would have truly abandoned his family’s goal of dominating the Korean peninsula through nuclear-aided conquest or intimidation of the South. And as long as large U.S. ground forces remained in South Korea, the outbreak of war would still threaten to draw Washington into a conflict with a foe capable of hitting its territory with nuclear warheads.

That still-live prospect should be an awfully powerful reason for switching to a strategy I’ve long advocated – ditching diplomacy, withdrawing the U.S. troops in South Korea that expose the United States to nuclear danger, and permitting North Korea’s neighbors to handle Kim and his nuclear ambitions any way they wish.

Trade diplomacy with China doesn’t threaten to turn an American city into a glowing ruin. But it’s all too likely to result in open-ended talks that do as little to combat the economic and security threats created by Beijing’s trade predation as previous negotiations involving President Trump’s predecessors. As I’ve recently written, even if his administration could come up with a coherent set of priorities, adequately verifying any Chinese compliance with U.S. positions is a pipe dream.

But this latest American attempt at trade diplomacy faces two other seemingly insuperable obstacles. First, the President’s objective of reducing the U.S.’ massive bilateral trade deficit with China appears to neglect the makeup of this deficit – which matters more than its size. Specifically, his proposals to date envision narrowing the trade gap mainly by boosting American exports of farm products and energy to China.

Both sectors of the U.S. economy are obviously important. But neither can become a major driver of sustainable American prosperity, because they’re essentially involved in producing commodities – which have never added nearly as much value to national economy as manufactures. That’s why developing countries invariably view a transition from agriculture to industry as the key to their hopes for rising living standards, and why even wealthy energy producers like Saudi Arabia have resolved to focus more on manufacturing and other higher value activities.

And P.S. – that’s no doubt why the Chinese clearly consider this American demand the most appealing on the Trump agenda.

As for the intertwined threats of continued and rampant Chinese intellectual property theft, and of China’s master plan to lead the world in a wide array of “industries of the future” (the Made in China 2025 program), U.S. tariffs on the goods and services these policies already enable Beijing to produce and export could well deal its ambitions a major blow. And clearly, that’s the Trump administration’s aim.

But if so, why negotiate over these matters? The United States has made reasonably clear what it wants China to do. And it’s declared its intent to retaliate with trade curbs if China balks. If the Trump administration is serious about this approach, and confident that it will succeed, what is there left to talk about? Either the Chinese accede (in which case, as I wrote this week, towering verification challenges would remain), or they dig in their heels and the tariffs follow.

Further talks, unless they’re simply aimed at clarifying American positions, can only muddy the waters and encourage endless Chinese foot-dragging – including regularly throwing Washington a few crumbs of market share – by telegraphing a Trump reluctance to pull the trigger. All the while, the Chinese tech prowess ostensibly alarming Americans across the political spectrum will keep growing.

And as with the case of the Korean crisis, a far better American approach would be disengagement – i.e., a series of measures aimed at reversing the disastrously wrongheaded twenty-year U.S. effort to more closely link the nation’s fate to a country with which mutually beneficial commerce was never possible. The Trump administration has already taken some important steps in this direction. Chiefly, it has greatly tightened restrictions on Chinese takeovers of economic assets in the United States. And the President’s threatened tariffs have induced some factories to move from China to the United States. But as previously indicated, the administration also seems bent on helping U.S. companies invest more in the Chinese economy, which can only further widen the trade deficit and hand China more cutting edge American technology. And it’s given no hint of a comprehensive strategy to bring manufacturing supply chains now concentrated in China back to the United States.

The latter task, in particular, will entail a long-term effort – not exactly the American governing system’s strong suit these days. And success will also depend on thoroughgoing domestic policy reform. (See this article for one sensible list.) But compared with the apparent belief that, over any policy-relevant time frame, China’s will become an economy compatible with America’s, it’s the height of realism.

(What’s Left of) Our Economy: Trump’s China Trade Deal May be Even Worse Than it Looks

Tags

China, Financial Times, intellectual property, intellectual property theft, Lucy Hornby, Made in China 2025, manufacturing, national security, subsidies, tech transfer, Trade, trade deficit, Trump, {What's Left of) Our Economy

So much is so obviously wrong so far with the trade agreement just reached by the Trump administration and China that even Mainstream Media reporters have correctly identified many major flaws. As the joint statement released by the U.S. and Chinese governments made embarrassingly clear, Beijing has not made a single commitment that’s comprised of any specifics, that creates any time-frames for compliance, or that entails any penalties for non-compliance (although the United States considers the tariffs threatened to punish China for intellectual property theft to have only been “suspended”).

Despite the importance placed by almost everyone involved in America’s China policy inside or outside the government on doing something about that intellectual property theft, and about the Made in China 2025 program aimed at creating Chinese global dominance in numerous high tech industries crucial to prosperity and national security, Beijing pledged exactly nothing concrete on the former, and the only possible reference to the latter was a pledge by both countries “to strive to create a fair, level playing field for competition.”

And the sectoral priorities were discouraging from a U.S. standpoint – at least if you believe (as you should) that manufacturing actually or potentially creates outsized economic (not to mention national security) benefits for the nation in terms of productivity growth, jobs and output multipliers, and capital and technological intensiveness. For whereas “Both sides agreed on meaningful increases in United States agriculture and energy exports,” they simply “discussed expanding trade in manufactured goods and services.”

Possibly worse still: For all the references to “[working] out the details” and “[continuing] to engage at high levels on these issues,” the economic engagement between the two countries is not even being called a “negotiation.” Instead, it’s been termed a “consultation.”

But perhaps most troubling of all about the Trump approach is that even if the President’s core aims remained intact, and tariffs were imposed in order to halt China’s intellectual property theft, combat the Made in China 2025 program, and slash the trade imbalance, it’s unclear at best how effective they would be.

Leave aside the question of whether President Trump could convince affected chunks of the American economy ranging from agriculture to high tech to support any tariffs, and accept any short-term costs and disruptions in order to achieve China trade-related goals that all these industries consider crucially important. In the case of intellectual property and China 2025, how would Beijing’s concessions, or even outright capitulation, be measured? And what difference would actually be made?

For instance, would the tech companies whose knowhow is being stolen or extorted (via threats to cut off their access to the Chinese market if they don’t cooperate) really start pointing publicly to ongoing Chinese transgressions, after decades of lying low and hoping against all reason that the problem would simply go away or at least not worsen?

Even if they did grow spines and/or believe that the Trump or successor administrations would back them up by imposing prompt and severe punishments, would these companies suddenly become more careful about the technology that they transfer voluntarily? That sounds far-fetched because it would involve these firms backing away substantially from their longstanding strategy of supplying the world with their increasingly sophisticated products and services from China – and sacrificing the immense sunk costs they have already incurred in developing the Chinese supply chains needed to accomplish this goal.

Acquiring cutting edge intellectual property by hook or by crook is also central to the Made in China 2025 program. However unlikely in practice, smart and tough enough U.S. policies can in principle overcome the above obstacles to halting tech theft and extortion. But what about another aspect of this Chinese program – massive government subsidies for the industries involved? Is it the slightest bit realistic to believe that Washington will even be able to track these funds as they make their way from China’s secretive bureaucracies to its equally opaque production entities (which don’t really deserve to be called “companies” or “businesses” because they’re all to varying degrees arms of the state)? How on earth would that work? And when has the United States succeeded in halting subsidization in other Asian countries where the government’s role is equally pervasive?

Moreover, as the Financial Times‘ Lucy Hornby has just pointed out, ending yet another objectionable feature of the Made in China 2025 program – strong preferences for Chinese participants and various forms of harassment and discrimination for their foreign-owned rivals – would kneecap two other major and related Trump administration China goals: reducing the bilateral trade deficit and curbing the offshoring of American production and jobs to the PRC.

For if China becomes an easier place to do business, U.S.- and other foreign-owned multinationals would become that much more likely to use China as their global production bases.

President Trump correctly understood that a critical mass of U.S. voters were fed up with his predecessors’ Offshoring Lobby-dominated China policies and hankering for a strategy that put domestic production and employment first. He was also right in insisting that such a course change would strengthen the nation’s long run economy and its national security. But the latest trade agreement he’s reached with China, however tentative, makes painfully clear either that the President and his main advisers don’t yet know how to achieve these vital goals, or that he hasn’t yet been able to choose between competing approaches with which he’s been presented.