The United States has legitimate complaints against Chinese trade and technology transfer practice, but the Trump Administration’s ineptitude threatens to turn what should be a tough negotiation into a trade war. An unclear chain of command and mixed signals about US policy demands have led to a breakdown in China’s efforts to negotiate a mutually acceptable deal with Washington through low-profile diplomacy, because the Chinese side can’t tell which Administration officials are authorized to speak for the Administration, according to Chinese sources familiar with the events.
Confusion about who’s in charge in Washington also plague the tri-partite negotiations over the NAFTA treaty with Mexico and Canada. US, as well as Mexican government officials, had expected that meetings in Washington on April 6 would lead to an agreement in principle before President Trump left for Latin America.
After hours of talks last Friday with US Trade Representative Robert Lighthizer, though, Mexico’s Economy Minister Ildefonso Guajardo and Canada’s Foreign Minister Chrystia Freeland had nothing to report. Reuters reports that a lack of clarity over a US demand to raise the North American content of vehicles imported under NAFTA was a stumbling block.
The Trump team meanwhile has sent contradictory signals on an almost daily basis, with Treasury Secretary Steve Mnuchin and Economic Advisor Larry Kudlow pointing to a negotiated settlement while the President threatens escalation of punitive trade measures. World stock markets whipsawed all week in response.
Confusion in the Trump team reflects a deeper confusion in US policy, which has two quite different goals. One is to constrain China to eliminate manifestly unfair trade practices, of which the most egregious is the forced transfer of technology by American companies seeking access to the Chinese market.
A second is to forestall the “Made in China 2025” plan to replace high-tech imports with local production – an unprecedented demand, for it proposes to penalize China for future rather than past behavior. Yet another is the president’s determination to reduce the trade deficit itself, which is arithmetically impossible for the time being. The United States cannot finance a trillion-dollar US budget deficit without borrowing from foreigners, and foreigners cannot lend the United States the money to finance a trillion-dollar budget deficit without selling more goods and services to the United States.
The fact that China often plays dirty has very little to do with the magnitude of the US balance on goods and services, or current account. Americans save less than the citizens of any other industrial country. The less they save, the more they buy from foreign countries. Countries as a whole save by selling goods and services to other countries and saving the difference. Countries with rapidly-aging populations (like all of East Asia as well as Germany) tend to save more, and do so by exporting more than they import.
US savings as a share of household disposable income have plunged to barely 2%, around the all-time low. That means that the US trade deficit will rise, especially because the US has a massive deficit financing requirement in part due to Trump’s tax cuts.
American households will save about $400 billion during 2018 at present rates; even if they put every penny of their savings into Treasury securities, the US government would still have to raise another $600 billion or so. The Federal Reserve has stopped buying US government bonds through so-called quantitative easing, and commercial banks have stopped buying government bonds because their own cost of funds is almost as high as the yield on five-year Treasury securities.
Corporations might buy some government bonds, but not enough to make a difference. So the US will have to borrow several hundred billion dollars from foreigners. Foreigners now hold about $6.2 trillion of US Treasury securities, and the total will have to rise during 2018 and 2019.
Where do foreigners get the dollars with which to buy US Treasury securities? By selling goods and services to the US.
Apparently, no-one has explained to the US president that he can have one of two things, but not both: a budget that cuts taxes while maintaining entitlement spending, and a lower trade deficit. There is, of course, a way to lower the trade deficit (but not the budget deficit), and that is to have a recession. If Americans lose income and stop investing they will buy less from foreigners and the trade deficit will fall. That’s not what Trump wants, of course, although he might get it in the aftermath of a trade war.
Because the dollar is the world’s reserve currency, America is able to borrow in order to spend. The US Congress apparently believes that America’s borrowing power is infinite because it continues to spend and to program future spending that depends on foreign borrowing – which is the same as saying that it depends on increasing US trade deficits.
If the US administration demands that the rest of the world (starting with China) shrink its trade surplus with the United States, it will also hasten the arrival of the day when the US no longer can borrow at low interest rates to pay for entitlement programs. Americans will wake up and find themselves poorer and less secure, the way the British did after the Sterling crises of the 1960s.
I have argued on several occasions in this space and in articles for The Journal of American Affairs that the only path out of the savings and trade-deficit trap lies through innovation. America is (or at least used to be) far better than China at innovation. America’s complaints about Chinese theft of intellectual property are justified, but they amount to closing the barn door after the dragon has left. In 2003, for example, Huawei admitted to stealing code from Cisco. Today Huawei is manufacturing chips for mobile phones that compete with Qualcomm’s. Huawei’s R&D budget has jumped to $14 billion in 2017 from only $4 billion in 2011.
What America has to fear most is not Chinese theft of existing technologies, but Chinese invention and commercialization of new technologies. If China surpasses America in the deployment of new technologies, no protection in the world will save the United States from decline.
US neocons do not care for facts nor reason. Their objective is to prevent the rise of China. The trade war will come about and extreme pain will be inflicted on the US economy.
We are very well paid indeed for being the world’s policeman, in the form of seigniorage resulting from the dollar’s reserve role. Remove American military power and the dollar will go the way of sterling.
President Trump is threatening a trade war with China, because he mistakenly believes that China exports $500 billion more goods to the United States in the Sino-US trade relationship.
In actuality, China’s NET trade surplus with the United States is zero. There are four components to US "trade" with China.
1. US goods exports to China
2. US services exports to China
3. US goods assembled in China and sold to Chinese (never imported or exported)
4. US service companies in China selling services to Chinese (never imported or exported)
Last year, the US imported $506 billion in goods from China.
The US exported $130 billion of goods to China.
China had a merchandise trade surplus of $375 billion.
However, 60% of China’s trade surplus is due to the operations of foreign companies. China only has a 40% stake in its trade surplus. (Source: "Trump’s China tariffs risk backfiring on US business | Nikkei Asian Review March 24, 2018")
After excluding foreign companies manufacturing in China and exporting goods, China only owns 40% of the merchandise trade surplus.
$375 billion x 0.4 = $150 billion
The US has a $38 billion services trade surplus with China.
$150 billion – $38 billion = $112 billion
Apple assembles iPhones in China for sale to Chinese. Apple’s sales in China was $48 billion in 2016.
Caterpillar sales in China are about $5 billion per year.
GM assembles and sells 4 million cars per year in China. Let’s assume GM receives $5,000 per car sold in China. This means GM sales in China is $20 billion per year.
Ford assembles and sells 1 million cars per year in China. Let’s assume Ford receives $5,000 per car sold in China. This means Ford sales in China is $5 billion per year.
$112 billion – $48 billion (Apple) – $5 billion (Caterpillar) – $20 billion (GM) – $5 billion (Ford) = $34 billion
Las Vegas Sands Macau (China) revenue is $7 billion.
Wynn Resorts Macau (China) revenue is $2 billion.
$34 billion – $7 billion – $2 billion = $25 billion
When you account for Intel, Qualcomm (licenses to China and royalties), GE, 3M, NIke, McDonald’s, KFC, Starbucks, and Coca Cola sales in China, the overall US-China NET trade balance is approximately zero.
It lacks one major fact … US doesn’t graduate enough STEM whose come mainly from China or India and because these countries are thrieving, these "talents" will stay at home and add one hurdle … Trump want to reduce H1B1 visas …
David Goldman More like a race between two hares, but the US has a significant lead and started much learier.
David Goldman You made a lot of good points in the article. But this Huawei stealing Cisco codes in 2003 and such charges sound so yesterday. If any Chinese companies steal the US companies’ IP, then sue them, which was what Cisco did back then. Huawei’s success does not have much to do with stealing or Chinese state subsidies as the US repeatedly accuses, it has everything to do with Huaswei as a successful and hard-charging company. Likewise, this characterization of certain market-for-technology deals by China as "thief" or "forced" is just excuses. These are voluntary agreements by two business partners. If the US doesn’t like it, it can challenge then practice in WTO court or even negotiate with China for mutual market access agreements.
But you’re fundamentally right, that real fight is about innovation, all other fights are either meaninless or diversion tactics.
It was close to half a century of systematic looting and suppression of China’s IP development. No wonder the country is still relatively poor.
Just look at the typical T&C (Terms and Conditions) that the major American importers demanded of their vendors, and you will find similar provisions everywhere:
"CONFIDENTIAL INFORMATION; NONDISCLOSURE
Supplier shall not at any time, during or after the Term of this Agreement, disclose to others, take or use for its own purposes or the purpose of others, any of Company’s confidential information, knowledge, designs, data, know-how, trade secrets, or any other information considered “confidential” or “proprietary” by Company. Supplier understands, agrees and recognizes that this obligation applies, but is not limited to, technical information, designs, marketing and financial information, and any business information that Company treats as confidential. Any confidential information, knowledge, designs, data, know-how, trade secrets, or any other information considered “confidential” or “proprietary” by Supplier which the Supplier shall have disclosed or may hereafter disclose to the Company and which in any way relates to the goods or services covered by this order, agreement or contract, shall, unless otherwise specifically agreed to in writing by the Company be deemed to be confidential or proprietary information and further shall be acquired by the Company free from any restrictions (other than a claim for patent infringement) as part of the consideration for this order, agreement or contract. No cause of action will arise on Supplier’s behalf for Company’s use of any confidential information disclosed to Company, and no damages whatsoever shall accrue to Supplier for Company’s use thereof. Supplier shall keep confidential any and all technical processes and information, economic and financial information, designs, data, marketing information, and any other business information that Company treats as confidential furnished to Supplier in connection with this order, agreement or contract and Supplier shall not divulge, export or use directly or indirectly, such information for the benefit of any other party without obtaining Company’s written permission. Supplier shall return all items belonging to Company and all copies of documents containing such confidential information in Supplier’s possession or under Supplier’s control upon request by the Company or termination of this Agreement."
[Note how that "what’s yours ends up mine" language is craftily hidden in the middle of the passage, buried deep inside the fine print.]
You think that is bad? Try this next clause found in most of the contracts from big American buyers:
"INTELLECTUAL PROPERTY
Absent a separate express agreement between Supplier and Company and after one year from date of importation of Merchandise into the United States which in any way relates to the goods or services covered by an Order, Supplier will irrevocably grant to Company a full paid up, royalty free license to make, use, sell and offer for sale any such Merchandise free of any claim of infringement or misappropriation of any intellectual property of Supplier. The aforementioned paid up license will remain in effect until the expiration of any intellectual property relating in any way to the Merchandise."
__________________
Can you imagine clauses like that imposed on Microsoft, or Intel, etc., by any Chinese entity without causing a fire and brimstone response?? Yet this sort of chicanery (getting valuable IP without paying fair value) is imposed by major American companies in contracts of adhesion on hundreds of thousands of Chinese exporters year in and year out.
What is good must be universal. If IP is to be protected, everyone’s IP should be protected.
Forced sharing of IP? How many instances? Over how many years? What was the worth of the IP forcibly transferred?? What is the evidence?
Millions of documented cases. Over the past 40 years. Total worth of Chinese sellers’ IP robbed, probably over US$100 Trillion. Evidence: contracts of adhesion couched as Standard Terms & Conditions for
Vendors, used by most major American buyers of MIC (Made in China), appropriating the trade secrets and other IP (patents, TMs, copyrights) of Chinese sellers.
What is good must be universal. It is indeed high time to discuss all issues and even the playing field. When it is done over decades on such a wide scale, it is systemic wholesale looting of the developing nation’s IP and technology.
The US economy is dominated by the financial sector. Everything is an appendage of finance and goes to service finance. Production of actual physical goods that people consume is secondary. Asset inflation, stocks and real estate, is "wealth creation". Any and all kinds of economic rent is encouraged and considered wealth creation. All disposable income goes to support this process. The financial sector is like a giant vacuum cleaner sucking up all wealth in the economy. Most GDP and jobs involve activity to enhance this process. One million plus lawyers billing at $500 an hour is wealth creation. Buying and selling existing houses is wealth creation. Armies of brokers are creating wealth. Banks offer "products". All fluff. All factory-free.
The Chinese, like classical economists, see the financial sector as a necessary part of a modern economy based on production of goods and services that people actually consume, but must not be allowed to become an end in itself, as it has been threatening to do.
Hence, Xi Jinping condemns rent seeking and said that "houses are for living in, not for speculation". Real estate speculation and asset inflation are considered evils and the government has taken measures to control it. Reform of the financial sector has been identified as one of three major problems to be tackled, alongside of poverty and pollution, over the next few years. You either control finance or it controls you.
"unfair trade practices, of which the most egregious is the forced transfer of technology by American companies seeking access to the Chinese market."
Haha. You have to give something to get something, but you don’t have to play if you don’t want to. No one is forcing you. Grow up Goldman, this is not colonialism, this is capitialism.
David Goldman No not exactly! Check out China’s BRI in its comprehensive scope. They do bilateral trade agreements and don’t use them to export any rules or policies. They enjoy trade surpluses in virtually all of them. We export policy and rules in our multilateral trade agreements and give up a lot to sweeten the deal and get the partners to sign up. Result we have terrible trade deficits. China loans money to their trading parners and collect interest as well as sell them raw materials and services. We give foreign aid (welfare).
David Goldman Trump is awake. Who else???
The position one takes on Trump’s actions depends on where one starts their analysis. I start with the world in 2025 when China has achieved its vision of the New Silk Road. All the stuff that is imported by the United States will suddenly cost a fortune mto US citizens as China decides to back the Yuan with gold and demands payment for its exports to the US in gold or gold backed currency. They will be able to do this because they will no longer need the trade surplus with the United States which they will have supplanted by trade with Asian countries.
The United States will be left out in the cold because they don’t make the products they imported and we will become like Argentina.
Trump is trying to paint a different outcome. He is trying to get the United States to make things we import/ Yes it will make them more expensive but pay me now or pay me later and Trump prefers to control his own destiny rather than leave it to the fates.
Trump is up against the globalists who don’t care what country wins as long as they are on the winning team. So this battle is ugly. A stupid, myopic, parochial domestic media doesn’t help.
It’s a shame because Trump could bring about a more peaceful world with Xi Jinping and Vladimir Putin.
Goldman makes good points but he is too close to the details.