The China that can say no
I’m not at all a fan of the Chinese government, especially Xi Jinping. But I do wish the best for the Chinese people, so I’m offering some advice in this spirit.
Right now the Trump administration is pressuring China on a number of fronts. I believe that China is in a far stronger negotiating position than many people realize, perhaps stronger than they realize. Here are some factors to take into account:
1. China is a huge country. It has the world’s biggest economy and the gap with the US gets wider every year. It has more than 4 times the US population. It does far more trade than any other country. Its current account is approaching balance. Trade with the US is a small share of China’s GDP. The US does have a big military advantage, but that’s of no use in trade negotiations.
2. It’s true that China has a large trade surplus with the US, but that cuts both ways. We could hurt China by cutting off Chinese imports, but that action would hurt the US just as much. Imagine consumers showing up at Walmart or Target and finding no Chinese goods—the shelves would be almost empty. Now imagine Walmart’s buying manager calling up their Indian purchaser, and asking how long it will take India to make up for the lost output from just the Pearl River delta. A decade? Two decades? Are American consumers that patient?
3. The Chinese people have been through much greater hardship than the American people, and are much better positioned to survive the unpleasantness of a trade war. (BTW, the greater Chinese tolerance for hardship has been noted by historians going way back in history.) In addition, Trump has little support for his trade war in either the Democratic or Republican Party leadership, whereas the Chinese government is more unified. Trump may lose the House in November, and has to think about the 2020 election as well. The Chinese should delay, delay, delay. Time is on their side.
Overall I think it’s in China’s interest to stand up to Trump. Bullies like Trump tend to be cowards, who back down when someone actually puts up a fight. If the Chinese do want to grant any concessions, they might consider lowering a few trade barriers, which would actually help China and thus not really be a “concession” at all.
What about Chinese rules that force foreign companies to provide intellectual capital as a pre-condition for entering the Chinese market? It’s hard for me to get worked up about this issue, for a number of reasons:
1. The US does far worse things, such as putting extreme sanctions on companies that do business with Iran, even if those companies are located in countries that have perfectly good relations with Iran, and who support the Iran deal along with 90% of the rest of the world. The US is a big bully that tries to force the whole world to do as we do. We also bully smaller countries like Canada in international trade disputes, often ignoring our own agreements. We are the last people who should be criticizing China for not playing by the rules.
2. One can make a good case that it’s efficient for foreign companies to be forced to transfer technology to China. Intellectual property laws are too restrictive, and the benefit of the technology to the 1.4 billion people in China probably far exceeds the cost to the companies and their stockholders. And who are we to complain about a country using its size to get its way?
From a fairness perspective, keep in mind that China’s size is a disadvantage in international trade. China contains by far the most homogenous large population anywhere; indeed there is nothing else on Earth like the 1.26 million billion strong Han ethnic group. This means that China is constantly suffering from disadvantageous terms of trade whenever it goes into a new industry. In contrast, Switzerland can specialize in a few industries without driving prices down to rock bottom. So from a “fairness” perspective, the forced technology transfers merely offset the huge disadvantage China faces in trade due to its massive size and homogeneity. (This homogeneity is a gold mine for US corporations—why shouldn’t they have to “pay to play”.)
(It would be different if the job skills in various Chinese regions were as diverse as in Europe, but they are not.)
I didn’t even mention other possible Chinese advantages, such as their strong authoritarian dictatorship, because I’m not convinced dictatorships actually do have more power. However, others might cite that factor.
PS. Several commenters asked me about an article claiming that the Chinese thought Trump was a formidable negotiator. Here’s how I responded:
Trump’s been in office 18 months and done an amazingly bad job of negotiating. For instance, he desperately needed McCain’s vote to repeal Obamacare, and instead mocked the fact that he was captured by the North Vietnamese (where he was tortured.) Is that how smart negotiators win people over to their side? He gave N. Korea the recognition it wanted and got nothing meaningful in return. He tore up the Iran agreement and failed to negotiate anything better. The EU president ran circles around him in yesterday’s agreement. Putin made a fool of him. He blabbed out top secrets to Russian officials in a White House meeting. Where is the evidence that he’s a good negotiator? I know; it’s all a secret master plan that only a select few can understand.
I’m guessing that a few of these glowing comments from the Chinese are a tactic to butter Trump up so that they can more easily use their vastly superior negotiating skills to run circles around him, just as Juncker did yesterday.