President Trump's right-hand guy Steve Bannon has been called everything from a “mastermind” to a “racist, anti-Semite.” Regardless of what you think of Bannon, he just made a very good point about China.
“To me, the economic war with China is everything. We have to be maniacally focused on that,” Bannon told the American Prospect in a jaw-dropping interview that covered everything from urinating on yourself to North Korea. “If we continue to lose it, we're five years away, I think, 10 years at the most, of hitting an inflection point from which we'll never be able to recover.”
Many experts across the political spectrum say Bannon is right: China is beating up America economically, and neither the U.S. government nor U.S. businesses have done much about it for years.
“It's a weird day when I agree with Steve Bannon, but he's right on this,” says Jennifer Harris, a China expert at the Council on Foreign Relations and a former top staffer in President Obama's State Department. “Going back to George W. Bush, America's policy toward China has been to ask nicely. That has not panned out well.”
Trump often points to the United States' $310 billion trade deficit with China last year as the ultimate sign of a “bad deal.” But that's not the real problem. The deficit is happening mainly because Americans are shoppers, not savers. People in the United States buy a lot of stuff, and that's unlikely to change.
The real issue is that the Chinese are pirating American ideas and technologies. In the 1990s and early 2000s, people were worried about China illegally copying movies, music and books. The stakes are a lot higher now as the world's top economies compete on groundbreaking technologies in cloud computing, robotics, artificial intelligence and gene editing. Whoever controls these technologies will dominate global business — and more.
“When historians look back at this period of history, they are not going to wonder why the Chinese were stealing U.S. intellectual property or business practices, they are going to wonder why the U.S. didn't defend itself,” says Gordon Chang, an expert on the Chinese economy and author of “The Coming Collapse of China.” He thinks Bannon is wise to hit China now. The Communist Party of China is gathering for its big conference this fall that happens only once every five years. President Xi Jinping has a lot to lose if tensions flare with the United States.
Since the 1990s, the mantra in corporate America and the White House has been that America needs to cozy up to China. CEOs were salivating at getting access to the largest market on the planet: 1.4 billion Chinese. But it hasn't worked out like executives dreamed. China has deftly put up barrier after barrier to make it hard for American companies to sell in China. In the meantime, Chinese firms have profited and are now buying up American companies — everything from W Hotels to Silicon Valley startups. A Pentagon report this spring warned that China is pumping billions into hot Silicon Valley companies that are working on cutting-edge military equipment.
“China is limiting market access for U.S. companies in China, yet the Chinese wanted unfettered access to America,” says Evan Medeiros, an Asian strategist at the Eurasia Group who served as Obama's top adviser on the Asia-Pacific region. “We need to rethink China's very substantial access to investment in the U.S.” Direct Chinese investment in the U.S. is up nearly fourfold in the past two years.
Bannon has a battle plan, and he's already unleashing it. On Monday, the Trump administration launched an investigation into whether China is hijacking American business ideas under Section 301 of the 1974 Trade Act. At the moment, China forces U.S. companies doing business there to "share” their technology because they have to do a joint venture in order to operate in China. The Section 301 move is in its early stages — an initial fact-finding phase — but Bannon made it clear that he plans to push this along.
“We're going to run the tables on these guys,” he said in the interview. And he is prepared to do even more. He also mentioned bringing a lot more complaints against China for steel and aluminum dumping. On the campaign trail, Trump frequently threatened to slap massive tariffs as high as 45 percent on goods coming from China to the United States. CEOs hated the idea. It would raise costs on American consumers, they argued. Bannon isn't going that far. Instead, he's targeting his actions to go after the deeper IP issues and how China subsidizes many of its companies to give them a leg up against foreign competition. It would be a real wake up call to the Chinese, experts say.
“We're looking at the most serious U.S. trade action against China probably ever since China opened up,” says Derek Scissors, a China scholar at the right-leaning American Enterprise Institute who helped advise the Trump administration on the recent Section 301 move. Scissors has been calling for years for Chinese firms that have stolen U.S. intellectual property to be banned from doing business in the United States.
Bannon's right to take the China threat seriously, but he's also been pushing policies that would be hugely detrimental to America's competition with China. First and foremost: Immigration, the process by which America attracts the people who come up with so many of the great ideas that America has and China wants. Trump's recent proposal to cut legal immigration in half and his failure to fully condemn the actions of white supremacist groups this weekend are being read around the world as a “You're not welcome here” sign. That's not going to help America win the global talent wars.
“Creating new IP in the United States is more important than keeping IP from China,” wrote James Andrew Lewis, a senior vice president at the Center for Strategic and International Studies, in a blog post this month.
Perhaps the most surprising part of Bannon's interview this week was when he called North Korea a “sideshow.” Trump had tried to do a deal with China: If Chinese leaders could contain North Korea's weapons program, then Trump was ready to look the other way on trade. Bannon thinks that's a huge mistake — and so do a lot of people on both sides of the political aisle.
“I think Trump is making a strategic miscalculation. You need to tell the Chinese that both of these issues are important and both need to be addressed on their own,” Medeiros says.
Whether Bannon can put his ideas into practice is another question, as there are vested interests in at least parts of the status quo. The biggest obstacle Bannon faces in his quest to go after China is what he calls the “Wall Street lobby.” Trump's top economic advisers — Gary Cohn at the National Economic Council and Treasury Secretary Steve Mnuchin — are former Goldman Sachs executives who don't want a trade war with China or anybody else. Scissors saw the tensions firsthand. He described a lot of "flipping around" on what to do.
Former Obama administration staffers such as Harris and Medeiros saw similar tensions play out in their time. They say the business community talks out of both sides of its mouth on China. CEOs complain that the Chinese government is restricting business opportunities, but when the U.S. government prepares to act, CEOs warn of a “parade of horribles” like trade wars and even a recession. Harris thinks it's overblown.
“I'm actually skeptical that China will retaliate, especially ahead of the party congress this year,” she says. The business community made the same huff and puff before the U.S. put sanctions on Russia. “We all woke up the next day, and European banks didn't fail and the stock market continued to go gangbusters.”
Bannon just might be able to get Trump to do what the Bush and Obama administration failed at on China. That is, if he can stay in the White House long enough to make it happen.