A United Front for a More Open China

31-Dec-2016 Intellasia | WSJ | 6:00 AM Print This Post

America and Europe should coordinate tougher economic policies on China.

One source of rising populism in the US and Europe is growing dissatisfaction with the impact of trade and investment with China. The country’s entry into the global economic system, bringing a huge pool of labour into the more integrated global economy, has been disruptive.

But China exacerbated the disruption with policies that tended to limit imports and inward direct investment. Some American and European firms and workers have benefited from exporting to China, but the numbers could have been much greater, and the adjustment eased.

In the early days of China’s entry into the World Trade Organisation, there was a tendency on both sides of the Atlantic to give China the benefit of the doubt and assume that its economy would become more market-oriented over time. In the event, there has been little progress in dismantling China’s mercantilist policies.

As a result, US and EU stakeholders have become increasingly frustrated. This is evident in campaign statements from across the political spectrum in the US and Europe.

Donald Trump floated ideas about harsh measures toward China, such as naming it as a currency manipulator or imposing 45 percent across-the-board import tariffs on Chinese goods. Trump will not necessarily do these specific things as President, but he is likely to introduce some measures against China’s trade and investment with the United States.

In adjusting policies toward China, it would be smart for the new administration to coordinate with Europe. Economists generally agree that China is intervening to keep its currency high, not low, so there is no traction in Europe for designating the country a manipulator. High tariffs would violate World Trade Organisation (WTO) rules and Europe is likely to side with China in upholding those rules.

The area with the best potential for coordination is the growing investment by Chinese enterprises in the US and Europe. State-directed firms earn profits in China behind protected walls and have now started to buy their competitors overseas. Western firms cannot make analogous purchases in China because of severe restrictions on investment in modern services, energy, agriculture and high-tech sectors.

As it contemplates its future relationship with China, the new US administration might need to keep in mind the following facts:

? For the past few years China has been investing heavily throughout the European Union, its second-largest trading partner. If Washington engages in a trade war with China, Beijing would likely turn to the very same European countries with which it has built a close partnership. One example are the 16 Eastern and Central European countries that have joined China in a “16+1″ forum.

? China has targeted the European Union as a consumer market for some time, but it is now doing so more aggressively through its “One Belt, One Road” initiative, a network of regional projects encompassing road and rail routes, oil and gas pipelines and facilities connecting China to Western Europe, through Central Asia, Russia and the Caucasus. It also includes maritime routes through Southeast Asia, part of Africa and the Middle East, all the way to Southern Europe.

? This has been accompanied by China’s creation of new financial institutions, such as the Asian Infrastructure Investment Bank (AIIB), which now has over 60 members – and does not include the US Several key European countries (such as the United Kingdom, Germany, France and Poland) are founding members of the AIIB.

? China and the EU are engaged in several major discussions, including on the market-economy status that Beijing claims as part of its WTO membership, as well as a free-trade agreement and a bilateral investment treaty.

As a rising global power, China now has a much wider scope than when it joined the WTO in 2001. It is not merely a top trading nation. China has other instruments and alliances at hand – including with traditional US allies.

China wants to continue investing abroad, through mergers and acquisitions as well as greenfield investments, and it has been pushing its state-owned enterprises in particular to “go abroad.” Western brands, especially in information and communication technology, have been targeted, leading to notable debates in Germany and the US

Europeans may create a mechanism similar to the Committee on Foreign Investment in the United States (Cfius) to look at national security and economic implications of foreign acquisitions. By working together in obtaining reciprocal agreement for Western companies in China, Americans and Europeans would get better results than threatening tariff sanctions on Chinese products that would lead to a trade war.



Category: China

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