As China Pivots, Donald Trump Risks Fighting an Old War

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

President-elect’s emerging policy highlights trade retaliation as Beijing shifts to a form of high-tech protectionism

To see the potential pitfalls in Donald Trump’s emerging policy on Beijing, look no further than “Death by China,” a book by the president-elect’s pick to help revive US manufacturing.

Peter Navarro, the Harvard-trained economist designated to head the new White House National Trade Council, calls it a “survival guide” against “the planet’s most efficient assassin.”

He cites China’s perils: faulty products from “toxic toddler overalls” and “flaming pajamas” to “arsenic-laden vitamins” and “self-immolating boom boxes.” And China, he writes, is killing millions of US jobs with products mass produced in pollution-spewing sweatshops using “slave” labour.

Navarro also issues a call to arms. To counter this onslaught, Washington must punish China for manipulating its currency – Beijing’s prime “weapon of job destruction” and the reason for massive US trade deficits. Consumers must shun Chinese products to weaken Beijing commercially and militarily, he writes. Every ” Wal-Mart dollar” spent on Chinese imports “represents a down payment on our own unemployment as well as additional financing for a rapidly arming China.”

Like most caricatures, the book contains elements of truth; Chinese mercantilism undoubtedly fueled surging exports that were partly responsible for devastating US Rust Belt communities. Yet it is also hyperbolic and out-of-date, reflecting a way of thinking about China that increases the likelihood for backward-looking and overblown remedies like the 45 percent tariffs on Chinese exports Trump has threatened.

Worse, such protectionist measures will do little to address the next China shock: Beijing’s efforts to seize the technologies that will drive American prosperity in the 21st century and provide future jobs.

Chances are they will exacerbate the problem.

China is fixed on the future. It is already shedding sunset industries it captured from the US and promoting cleaner, smarter manufacturing from 3-D printing to aviation and electric vehicles. Under a plan called “Made in China 2025,” China aims to replace foreign products in these and other high-tech fields with locally produced ones – and then export them to the world.

The playbook is familiar: China first welcomes foreign companies to build manufacturing ecosystems, and once it has forced them to disgorge their technology, squeezes them out. The blueprint doesn’t set explicit 2025 localisation targets, but a recent study by Germany’s Mercator Institute for China Studies found them in semiofficial documents elsewhere: 80 percent of renewable energy equipment, 70 percent of industrial robots, 40 percent of mobile phone chips.

And Beijing is backing the programme with abundant financing, much of it earmarked for Chinese purchases of US and European technology companies.

To be sure, state-led industrial plans have a long history of failure. Innovation works bottom-up not top-down. But the Mercator study concludes that Beijing will succeed in nurturing a vanguard of internationally competitive companies and that “Made in China 2025″ will “challenge the economic primacy of the current leading economies and international corporations.”

Instead of trying to turn back the tide of Chinese exports, the Trump team would be better off moving to reverse this latest iteration of techno-nationalism, which is already squeezing Western information technology companies out of China. Its fixation with closing the trade gap as a way of restoring the jobs of a bygone era is quixotic; some economists think that Trump’s stimulus measures may actually end up expanding the deficit by boosting the dollar, making US exports more expensive.

Erecting tariff barriers might play well with Trump’s blue-collar base looking for easy wins.

By contrast, countering techno-nationalism is far more complex, not least because so much of it is clandestine, says Scott Kennedy, an expert on Chinese industrial policy at the centre for Strategic and International Studies. It features hidden “Buy China” procurement practices by Chinese state-owned enterprises and state-backed funds masquerading as private equity to buy foreign technology companies.

Kennedy says the US and Europe should “fortify their investment review procedures” on China – and coordinate their efforts.

Derek Scissors, the chief economist of the China Beige Book, advocates more targeted measures to change Chinese behavior, such as blacklisting Chinese companies that have stolen US intellectual property. He doubts that banning Chinese state firms from acquiring US companies – an idea Navarro supports – would help much. The government could simply order private companies that acquire US technology to hand it over.

“The key choice is not what firms to ban, but what technologies to seal off,” he says.

These are tough dilemmas. Starting a trade war would complicate them further. Most likely, it would trigger retaliation and encourage even higher barriers to US investment.

China isn’t the Dickensian sweatshop portrayed in “Death by China.” Rather, it’s a key engine of global growth whose middle classes and businesses increasingly demand high-tech products and sophisticated services that Western industrial economies are so adept at supplying.

In the long run, the solution is to insist on more open Chinese markets, not to close American ones.


Category: China

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