Monkey Cage | Analysis
January 10, 2017 at 6:00 AM
As a candidate and as president-elect, Donald Trump tapped into the backlash against globalization and free trade, feeding the perception that U.S. companies are no longer competitive in the world.
China's growing economic capabilities have been a frequent target, with Trump labeling China a currency manipulator and threatening to impose tariffs on Chinese imports. Trump even suggested in a Fox News interview that if China wants the United States to be bound by the one-China policy, then China would need to budge on trade.
There are reasons to be skeptical that any of these moves would work. First and foremost, holding the one-China policy hostage to trade concessions is a weak position. China knows that the United States won't easily abandon the one-China policy, which is tied to U.S. security commitments. The Taiwan Relations Act, passed by Congress in 1979 after the U.S. normalized relations with China, commits to the peaceful resolution of Taiwan's future status, through informal diplomatic relations and the sales of defense arms to Taiwan.
Second, to understand what levers the United States really has in dealing with China requires a closer look at China's political economic behavior.
In the four decades since President Richard Nixon first went there in 1972, China has become the world's second-largest economy, leading destination for foreign direct investment (FDI), top exporter, and fastest-growing consumer market.
Trump has claimed China keeps its currency artificially cheap, resulting in the U.S. trade deficit with China — and part of the reason for China's global economic success.
In the past, China devalued its currency to keep exports attractive to foreign buyers — and discourage imports. More recently, after years of high-speed growth, manufacturing in China has declined. The Chinese government now focuses primarily on developing consumer and high-tech, capital-intensive sectors
China is now building up its currency, not devaluing it
Beijing also wants to make the renminbi a global currency. In late 2015, the Chinese yuan joined the International Monetary Fund's basket of reserve currencies, a move many economists saw as a first step toward global acceptance of China's currency. Thus, to encourage domestic consumption amid a slowing economy, stem capital flight, and maintain the renminbi's value, China is now shoring up its currency.
So the Chinese government is regulating to enhance, not restrict, the value of its currency, much in line with the findings of my first book. I argue that China has employed liberal economic and state interventionist tools to deliberately regulate the economy in sector-specific ways in different reform rounds since the 1980s. This "liberalization two-step" aims to achieve state goals of national security and national technological development.
My research also shows that across different industries, from automobiles and telecommunications to renewable energy, the Chinese government restricts the business scope and market entry of foreign companies. Non-tariff barriers, skirting commitments to World Trade Organization (WTO) principles, favor domestic Chinese companies and boost their global competitiveness. By intervening to manage competition, reorganize state-owned enterprises and restructure industries, China has developed a strong indigenous technology base, and actively promotes these exports around the world.
Is there a way for U.S. companies to compete better?
Chinese-style capitalism, with this extensive government support, is a concern for U.S. companies, both at home and abroad. But what's the best way to communicate that the United States would like to do more business with China — under the fair and competitive conditions both countries committed to uphold? How does the U.S. government assure U.S. companies have a market foothold in China, and can compete with Chinese imports to the United States?
Trump promised to impose 45 percent tariffs on Chinese imports, a move likely to provoke retaliatory measures from Beijing. The imposition of U.S. tariffs also would violate the U.S.'s own WTO commitments. Trump has also declared that he will invoke Section 301 of the Trade Act of 1974 to respond to unfair trade practices. But the WTO has ruled that doing so against other member countries will first require WTO approval.
There are better tools to help U.S. companies.
The U.S. government will have more success promoting the global competitiveness of U.S. companies by supporting worker training, encouraging industrial upgrading, and investing in research and development. Importantly, the United States has leverage as a WTO member to encourage the global trading body to enforce and arbitrate China's violations of WTO commitments. These tools promote firm competitiveness and encourage markets for U.S. products within global rules.
The Obama administration brought 14 trade enforcement challenges against China out of a total of 38 complaints filed by WTO member countries. These include a complaint against tariffs imposed on critical raw materials, which favor Chinese manufacturers at artificially low prices. The U.S. government has also filed anti-dumping or countervailing duty actions against China for unfairly subsidizing exports, including steel.
And what about the TPP?
Trump also threatened to abandon the Trans-Pacific Partnership (TPP), a 12-nation trade pact initiated by President Obama's "pivot to Asia" strategy. China is not included in the pact, a deliberate move to boost the competitiveness of these 12 countries.
But a TPP retreat would mean walking away from lower tariffs for U.S. products in 40 percent of the world's economy. Moreover, abandoning the TPP could embolden China in the Regional Comprehensive Economic Partnership, a trade agreement of 16 Asia Pacific countries headed by China, and an agreement that excludes the United States.
The Trump trade lineup is tough
By appointing U.C. Irvine professor Peter Navarro, author of "The Coming China Wars" and "Death by China," as head of the new National Trade Council in the White House, Trump sent a get-tough signal. The other chief architect of Trump's America First trade strategy is Wilbur Ross, a billionaire investor and the presumptive commerce secretary.
In early January, Trump named Washington insider and lawyer Robert Lighthizer as U.S. trade representative. Lighthizer, who previously served under President Ronald Reagan, has argued for more aggressive U.S. positions in the WTO's dispute settlement process in enforcing China's WTO commitments and favors one-on-one bilateral trade negotiations between countries.
What's more, appointing Iowa Gov. Terry Branstad as ambassador to China signaled to some analysts that Trump will "focus on negotiations and not ultimatums" with China. Branstad successfully parlayed his 1985 acquaintance with Chinese President Xi Jinping into trade and foreign investment between China and his state.
It remains to be seen how Branstad and Exxon executive Rex Tillerson, Trump's choice for secretary of state, will juggle U.S. security and business priorities. It's possible that the two business leaders will balance the anti-trade faction.
But two things seem quite clear. First, Chinese-style capitalism will continue with or without U.S. tariffs on Chinese products. Second, it's hard to see a scenario where the United States walks away from the one-China policy without a comprehensive assessment of political changes on both sides of the Taiwan Strait. This would include recent meaningful democratic developments in Taiwan, and of whether China has renounced the use of force to take over Taiwan (which China has not).
Roselyn Hsueh is associate professor of political science at Temple University and author of "China's Regulatory State: A New Strategy for Globalization."