March 22, 2018 / 3:59 AM / 5 months ago

Breakingviews - How Washington could really fix trade with China

HONG KONG (Reuters Breakingviews) - When Chinese President Xi Jinping’s top economic adviser, Liu He, visited Washington in early March, he made a reasonable request. Told that U.S. President Donald Trump was uninterested in resuming the duo’s “strategic and economic dialogue”, Liu asked for updated and specific demands.

Chinese Vice Premier Liu He attends the news conference following the closing session of the National People's Congress (NPC), at the Great Hall of the People in Beijing, China March 20, 2018. REUTERS/Jason Lee

The White House replied by asking China to shave $100 billion off the bilateral trade deficit, then started rolling out tariffs. Beijing will almost certainly respond by targeting U.S. agricultural exports like soybeans. But even if China does try to rebalance, it will probably retain the policy irritants corroding the world’s largest trade relationship. From the perspective of U.S. business, it would be smarter to demand revisions to the “Made in China 2025” plan, which proposes to develop cutting-edge export industries.

There’s nothing wrong with investing in research. But this programme relies heavily on the same old shortcuts that have destroyed jobs overseas while saddling Chinese banks with bad debts: namely, easy credit, state support for strategic foreign acquisitions, and swapping imports for local products.

This mix was used to great effect in simpler industries like steel, and will now cover aviation, electric cars, farm machinery and software, to name a few priority sectors. So even as Beijing promises lower barriers for foreigners in sectors like finance, officials are working frantically to make sure Boeing, Ford, Caterpillar and Microsoft will lose market share in the People’s Republic and, ultimately, abroad.

To be meaningful, however, any tweaks to the 2025 plan would have to be buttressed by changes to laws: an end to forced technology transfers to local players, for starters. Western firms are often pressured into sharing knowhow as the cost of market entry. PRC courts would also have to enforce overseas judgements against Chinese firms for intellectual-property theft. Currently, this is another loophole that offers a huge leg-up to mainland firms.

Far from being a burden, giving ground on these issues would yield huge dividends for Xi too. It would reset the American relationship and address a major cause of China’s debt problem. It would also show Beijing is ready to assume leadership on free trade.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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