WA China Watch Digest Special!

WA China Gang of Four panel discussion: U.S. trade deficit with China, fair and reciprocal trade

By Wen Liu   Dec. 15, 2017

WA China Gang of FourWelcome to the second WA China Gang of Four panel discussion, and meet our new and alternate member of the Gang, Benjamin Shobert, an expert in China’s healthcare industry.

U.S. trade deficit with China was a big concern for President Trump on his visit to China last month as well as during his campaign, as it has grown from $10 billion in 1990 to $83 billion in 2000 to $273 billion in 2010, and to $347 billion in 2016.

Speaking directly to his Beijing hosts, President Trump said the unfair trade practices driving this deficit must be addressed, such as barriers to market access, forced technology transfer, and theft of IP. He called this trade relationship “off kilter” and blamed past administrations for allowing this to happen.

Earlier this year, President Trump also instructed his USTR Robert Lighthizer to launch a Section 301 Investigation into those barriers, or Chinese laws, policies, and practices which may be harming American intellectual property rights, innovation, or technology development.

Considering the different economic structures and stages of development of the two countries, here is the question for the Gang: Do you agree that U.S. trade deficit with China is a problem, one driven by unfair trade practices on the part of China, and that U.S.-China trade should be “fair and reciprocal,” as being promoted by President Trump, and why?

Sidney Rittenberg, Sr.Sidney Rittenberg, Sr. (Bio: Starting in 1944 as an American GI in China, Sidney’s dramatic China career included joining the Chinese Communist Party, working closely with first generation Chinese leaders, heading a rebels group during the Cultural Revolution, and sitting in jail for 16 years as a foreign spy. Continuing that career in the U.S. since 1980, in Washington state in particular, Sidney has been a consultant, scholar, and author, especially of his China biography "The Man Who Stayed Behind.")

As I understand it, the issue of the trade deficit with China is, in itself, not a huge problem. But it is being used by the Trump Administration to becloud the real issues.
A number of facts about the origin of trade deficits:
          (1) Of the items that we import from China, the great majority, by value, come from foreign-invested companies in China.
          (2) American retailers like Walmart depend on these imports to provide low-cost goods to American consumers, thus benefiting our people.
          Trump, Xi at U.S.-China Business Exchange, Nov. 2017. Baidu screenshot.(3) American importers, distributors, and retailers profit from imports, as well as from exports.
          (4) Increasing our exports to China largely depends on our improving efficiency and learning to target the specific needs and demands of the Chinese market. An outstanding example of this failure was Google, which pulled out of China not because of censorship (which they knew about from the beginning) but from their failure to adapt to the Chinese marketplace and therefore being out-competed by Baidu. It was the failure of their business plan, not their ethical standards, that caused them to leave China—abandoning, I believe, some 80 million subscribers. Chinese “Netizens” are 70% into games and music, only 30% data. In our market, it’s just the opposite. The Google approach failed to meet the needs of the Chinese market. As for the strictures of Chinese law, Google was well aware of them before going in. Their chief representative in China is a talented lawyer.
         The issue of deficit balance is quite apart from the important points Dan makes about the lack of a level playing field for foreign companies in accessing the Chinese market. Or other issues, like forced sharing of technology. As for limitation of foreign shares in company stock—we place the same limitations on, for instance, the shares we allow Canadian companies to own in U.S. telecom corporations.

Dan HarrisDan Harris (Bio: Designated a Super Lawyer, Dan is almost synonymous with China Law Blog, one of the best law blogs on the web, also named to ABA Journal’s Blawg Hall of Fame. A leading authority on legal matters related to doing business in China, his perspective on international law issues have been sought by the Forbes Magazine, The Wall Street Journal, The Economist, etc. Dan writes and speaks extensively on Chinese law, especially on protecting foreign businesses in their China operations.)

I have trouble answering this question because I am not well-versed regarding the trade barriers the United States throws up against China. But as someone who knows well the trade barriers China throws up against U.S. companies I can say that it would be good to see China expand what it allows U.S. companies to do in China. The biggest issue my firm’s clients face is access to the China internet and the near impossibility of their selling their products directly to Chinese consumers via the internet.
         The big issue I see for American companies is getting China to open up its market more. China very closely controls certain key sectors of its economy, including most things internet related. This control means foreign companies cannot operate online in China without ceding much control to Chinese partners and this greatly minimizes their profits. On the hardware side, China uses a carrot and stick approach to help its own companies compete against foreign companies. The carrot is subsidies for Chinese domestic companies and the stick is making things tough for foreign companies in a host of ways.
         Having said all this, I do not believe China will budge even an inch on any of this because in the end it will always put its own perceived security needs over economics.

Carson TavennerCarson Tavenner (Bio: Carson’s China interest sparked early when he initiated a sister-school relationship between his school, Puyallup High School, and Nankai Middle School in Chongqing, Seattle's sister city. He taught East Asian history at the Air Force Academy where he had graduated. With his own Tai Initiative on China, Carson revived the once dormant Washington Sichuan Friendship Association, and has been promoting U.S.-China sub-national level communication and understanding.)

The PRC certainly implements prodigiously challenging policies of all kinds, some directly impacting U.S. trade and some indirectly. These policies affect Chinese and foreigners alike. As for what is "fair", I prefer to quote one of my U.S. Air Force colleagues. "What is 'fair'? 'Fair' is a condition of the weather." My lesson from this quotation is to always remember the world works by certain laws which are not always in line with our hopes for how it "could or should" work. Forgetting this universal truth is one of our primary errors. I personally think fair trade practices are wonderful and implement many of them myself, but they should be called something like "respectful trade" to reflect the decision to reduce one's greater advantage over others in order to manifest their improved market performance alongside you.
China Shippping Line. Baidu screenshot.          I think Americans - maybe other countries too - are applying an excessive level of our own perspective about concepts of individual human equality when talking about "fair trade" among nation-states. Such blurred vision masks us from seeing certain realities. While traveling in the PRC these days you can perceive that people are not treated fairly by their own state. The Cultural Revolution 2.0 (upgraded w/digital surround, AI analysis and facial recognition - yay!) is upon them. Certainly foreigners have no chance in the current environment to grow in market influence at a large scale.
         What's a possible response?
         The U.S. federal leadership could encourage the innovative use of state and city leadership to augment (bypass?) national policies to explore ways to better our advantages particularly in the areas of education and quality of goods and services to somehow circumvent bad/troublesome/"unfair" policies. For example, how might an American city's trade policies play a part in providing needed services to Chinese who've lost their credit due to social performance scores being too low? Is there possibly an Internet technology equivalent to Voice of America?

Ben ShorbertBen Shobert (Bio: As a China watcher and practitioner, Ben is versatile: helping American companies with their market access work in China’s healthcare, life science and senior care industries with his Rubicon Strategy Group, researching on health in Asia as a Senior Associate at the National Bureau of Asian Research, writing about aging and healthcare issues in China as a Forbes columnist, and teaching The Globalization of Healthcare Services & the Biotech Industry as a lecturer at the UW.)

For the last thirty years, America's approach to globalization has been naive, with the political costs to this naivety only now beginning to express themselves in our domestic politics. Naive to think that several billion low cost workers could enter the global labor supply without negatively impacting U.S. labor. Naive to think that trade deficits can be sustained forever, especially when the country running the deficit emphasizes policies that encourage consumption instead of investment. Naive to believe in an economic and political philosophy that asserted deep globalization would somehow miraculously create opportunities for unskilled American workers to retrain, geographically move, and find new jobs. But these are not China's faults; they are ours.
          China entered the modern era by leveraging the rule set that the West, America in particular, put in place. Has China played entirely by the rules? Of course not. Significant problems persist around where China restricts foreign investment. Many of China's mercantilist policies will have to change for globalization to advance, in particular as they relate to sectors closed off to foreign activity. In addition, there is much to worry about Xi's political and economic reforms (or lack thereof). There is no reason to turn away from difficult negotiations that put our bilateral economic relationship under a degree of stress.
         But the much greater danger to global trade may rest in America, where a fractured and economically anxious public are increasingly turning towards cheap political answers for very expensive questions. For the United States, rightfully proud of its ability to reinvent itself, to change, to embrace hard questions rather than pointing our finger at outsiders, now is a particularly difficult moment. While it would be easy to blame China for our economic problems, that would only make things worse.

(See WA China Gang of Four panel discussion on Amazon and China censors here.)

(For more information on major events in Washington state-China relations, go to WA China Chronicle.)