China Faces Tough Choices

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China Faces Tough Choices

Since it entered the WTO in 2001, China has successfully exploited the opportunities provided by that system without adhering to its rules. This has led to explosive growth in Chinese exports, while U.S. manufacturing employment fell precipitously. 

What the U.S. needs is the ability to sell what the U.S. specializes in, which are high-end goods and services, in China’s rapidly growing markets without facing informal barriers or fearing loss of sensitive intellectual property to emerging Chinese competitors that have unlimited access to state lending.  That means making China play by the common set of rules it agreed to when it joined the World Trade Organization, and abide by WTO rulings to resolve complaints, just as the U.S. and its other trading partners do when disputes inevitably arise. 

Actions in the short-term appear primarity aimed at addressing the superficial concerns of both sides and winning domestic political points.  For instance, “China will buy a “very substantial” amount of U.S. agricultural, energy and industrial goods, with purchases of farm products beginning immediately.”   Ad hoc, state-directed purchases of U.S. goods by China might dent the bi-lateral deficit, but they won’t address the underlying structural issues.

A larger impact will come from cuts in formal tariffs.  For instance, China, home to the world’s largest auto market, will remove existing 40 percent tariffs on U.S. auto imports.

Going forward, the argument will focus on Beijing’s promise to “curb” practices such as forced technology transfers, non-enforcement of intellectual property protections, and cyber theft. 

In exchange, the U. S. will reduce today’s 10 percent tariffs targeting $200 billion in Chinese imports, rather than raising them to 25%.  Unfortunately, there appears to be little evidence that China actually intends to abandon the mercantilist strategy that it has had in place since at least 2006. 

As Phillip Orchard explained recently in Geopolitical Futures, “Beijing thought it could buy its way out of the trade war by dramatically ramping up purchases of high-dollar U.S. goods it needed anyway, such as oil and gas, and by implementing modest reforms on market access and foreign investment.  China would happily buy as much “stuff” as it would take to allow Trump to claim victory on the deficit...

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