China's predatory trade practices

President Trump, a global loner, finds his hard line toward Beijing draw a crowd

By David J. Lynch

After almost a year of going it alone, President Trump finds himself with a surprising weapon in his trade confrontation with China: allies.
Pressure from Europe and Japan is amplifying the president’s vocal complaints about Chinese trade practices that he says discriminate against foreign companies and threaten U.S. economic growth — as fresh economic data Friday in Beijing showed the economy slowing more than expected.
To eliminate one major irritant, Chinese leaders already have begun scaling back an industrial policy aimed at dominating 10 technology industries, after concluding the president’s objections were widely shared and could not be resolved merely by waiting out the mercurial U.S. leader.
“One thing the Chinese have had to acknowledge is that it wasn’t a President Trump issue; it was a world issue,” said Jorge Guajardo, senior director at McLarty Associates and a former Mexican ambassador to China. 

“Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.”
Administration officials say President Trump deserves credit for driving a hard line toward Beijing at home and abroad. 

Attacking Chinese protectionism now has bipartisan support in Washington; Germany and the United Kingdom joined the United States this year in tightening limits on Chinese investment.
But critics say the president has not done enough to capi­tal­ize on those shared grievances, instead alienating European and Japanese officials this year by imposing tariffs on their shipments to the United States of steel and aluminum.
President Trump’s resolve to pursue his confrontation with China is doubted amid administration infighting and suggestions that the United States might settle for increased Chinese purchases of American products rather than demand wholesale changes to China’s economic system in ongoing trade talks.
“It makes sense to get the other countries more involved... But they don’t know how serious Trump is on the systemic reform bits,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics.
China has tried to defuse the global irritation over its mercantilist stance by signaling a willingness to revise a program of state subsidies and market share targets called “Made in China 2025.”
The new flexibility comes as Chinese industrial production figures Friday fell short of economists’ expectations and retail sales grew at their slowest rate in 15 years.
Analysts in China and the United States say China is modifying the Made in China program because of pressure from all its major trading partners.
In September, trade ministers from the United States, European Union and Japan issued a joint statement that blasted the use of subsidies in turning “state owned enterprises into national champions and setting them loose in global markets.”
The statement, which did not name any country, also rejected forced technology transfer and cyberattacks — underscoring key elements of the president’s attacks on Beijing.
U.S. Trade Representative Robert E. Lighthizer has described the subsidy program, which sets market share goals for Chinese industry, as imperiling U.S. technology leadership. 

China wants its semiconductor manufacturers to provide 70 percent of domestic needs, up from less than 20 percent today, threatening the $6 billion in annual U.S. exports.
But roughly a dozen other countries are even more dependent on high-tech manufacturing and exports of advanced factory gear, and are more exposed to China’s desire to replace purchases of foreign products with domestic alternatives, according to the Mercator Institute for China Studies in Berlin.
“The pushback from other trading partners is a really important piece of the dynamic here,” said Michael Hirson, a former Treasury Department attache in Beijing who is now with the Eurasia Group. 

“That’s because the Made in China 2025 program is more of a threat to Germany, South Korea and Japan than it is to the United States.”
External pressure drove China this year to open markets for financial services and automobiles, according to economist Andrew Polk, a partner in Trivium China, a Beijing-based consultancy.
On Friday, the Chinese government also temporarily rolled back a tariff increase on U.S. autos, implementing part of a trade-war truce Chinese dictator Xi Jinping and President Trump agreed to during their meeting in Buenos Aires this month.
Over the past year, Chinese authorities have eliminated the foreign ownership cap for life insurers, approved foreign financial institutions underwriting domestic bond offerings and agreed to lift limits on foreign stakes in automotive joint ventures by 2022.
“This isn’t just President Trump bellyaching. It’s the only bipartisan issue in Washington. It’s a concern for Brussels and Canberra and that recognition is what has helped drive accelerated market openings,” Polk said. 

“They’re desperate to change the narrative. They realize how the ground has shifted under them.”
From the outset, the president has pursued his plans for an “America First” remake of U.S. trade policy with little regard for sentiment abroad. 

He withdrew the United States from the 12-nation Trans-Pacific Partnership as one of his first official acts, and he has imposed unilateral tariffs to a degree unseen since the 1930s.
His attacks on the World Trade Organization also undermined any chance that China’s trading partners would unite in a comprehensive complaint in Geneva.
The United States did win E.U. and Japanese support for a complaint to the WTO alleging China has violated U.S. intellectual property rights. 

But rather than use the global trade body for a broader attack on China, the administration has demanded changes in the way the organization operates.
To critics, the administration missed an opportunity to marshal China’s trading partners behind an across-the-board indictment of its state-led economy.
Jennifer Hillman, a professor of practice at Georgetown University Law School, told the Senate Finance Committee last month that the United States “ought to be bringing a big and bold case, based on a coalition of countries working together to take on China.”
On their own, U.S. allies have responded to China’s ambitions to acquire foreign technology via acquisitions, cybertheft or coercive licensing requirements with heightened scrutiny of its investments.
The E.U. agreed last month to establish a new screening mechanism for foreign investments, motivated largely by a sharp increase in Chinese activity on the continent. 

But the E.U. measure leaves final decisions to national governments and falls short of the Committee on Foreign Investment in the United States.
The German government in July blocked two potential acquisitions by Chinese investors, following similar action by Canada two months earlier, and lowered to 15 percent from 25 percent the foreign ownership stakes that require review. 

British Prime Minister Theresa May’s government also announced plans for closer scrutiny of investments by foreign entities.
Despite his reputation as a global loner, President Trump’s views on China are becoming the conventional wisdom. 

Last month, as the president prepared to travel to Buenos Aires for an international summit and dinner with Xi, a top administration official claimed broad support for U.S. goals.
“The rest of the world knows that China has been violating common trade practices, WTO trading practices and laws. The rest of the world knows full well about the issues of IP theft and forced transfers of technology. They know that and they’ve said so. This idea that other countries are not with us — it’s just not true,” said National Economic Council Director Larry Kudlow. 

“The rest of the world knows this, and China knows the rest of the world knows this.”
U.S. and Chinese officials are racing toward a self-imposed March 1 deadline to negotiate a trade deal that would involve changes to China’s state-directed economy. 

Many Trump allies are skeptical China will agree to turn away from its state-directed system and embrace additional market changes.
With the United States and China locked in a geopolitical competition, it is easier for revision-minded officials to advocate changes in programs like Made in China 2025 by citing shared concerns among all the country’s major trading partners, Hirson said.
Chinese authorities have changed course under pressure before. 

In 2015, regulators scrapped plans to require foreign financial institutions to install Chinese software amid complaints from U.S., European and Japanese diplomats and business groups, said Erin Ennis, senior vice president at the U.S.-China Business Council.
“We have seen progress like this in the past when the U.S. and other trading partners had a nearly universal view,” she said.
Administration officials scoff at the proposed changes as cosmetic and designed to sap U.S. negotiating willpower.
Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, called disclosure of plans to allow foreign companies a greater role in the Chinese technology program “an influence operation at its best.”
He questioned whether changes in relevant Chinese laws would mean much so long as the courts remained under the control of the Communist Party.
“What the Chinese are talking about are really just baby steps,” he said.

A Weakened China Tries a Different Approach With the U.S.: Treading Lightly

Xi Jinping has begun lifting barriers to imports of American food, energy and cars — even as the United States maintains tariffs on $250 billion worth of Chinese goods.

By Keith Bradsher, Alan Rappeport and Glenn Thrush

Despite the offense China has taken at the arrest of a Huawei executive, a move requested by the Trump administration, Beijing’s response has been measured.

BEIJING — The recent arrest of a top Chinese tech executive at the Trump administration’s request seemed certain to provoke a geopolitical showdown pitting Beijing against Washington.
The detained executive is a daughter of one of China’s most admired business leaders. 

And her arrest, widely viewed inside China as a direct affront, comes at a time of already pervasive suspicion among the Chinese that the United States wants to block China’s rise through a trade war.
Yet seemingly against the odds, Beijing decided to take a measured response to the Huawei incident. The Chinese leadership has compartmentalized the situation as a law enforcement dispute while making concessions on trade to help defuse tensions.
China’s tempered approach is born, in part, out of a position of weakness. 

The country’s economy is in a sharp downturn, putting political pressure on Xi Jinping to reach a deal with President Trump. 

American officials recognize the leverage they now have, wielding tariffs to extract concessions that Beijing has long rejected.
In recent weeks, Xi, who in his tenure has challenged the United States’ global dominance more directly than any Chinese leader since Mao Zedong, has followed through on a series of deals that he struck with President Trump in Buenos Aires this month. 

He has begun lifting recently imposed barriers to imports of American food, energy and cars — even as the United States maintains tariffs on $250 billion worth of Chinese goods.
While the agreement was initially presented as a temporary truce in the trade war, both sides are pushing for a long-term deal that creates a framework for closer, more stable relations between the world’s two biggest economies. 

Vice Premier Liu He on Tuesday called the United States Trade Representative Robert E. Lighthizer and Treasury Secretary Steven Mnuchin to lay out an initial road map for negotiations, with the goal of face-to-face talks next month.
“The Chinese government really wants to negotiate a deal with the United States to calm down the conflict, not only because of economic difficulties right now in China but also for the sake of long-term relations with the United States,” said Tu Xinquan, the executive dean of the China Institute for World Trade Organization Studies in Beijing.
The trade truce, though, remains tenuous, and the negotiations could easily be derailed. 

While Beijing has made some overtures, it has not gone far enough to address some of the biggest sticking points like forced technology transfers and the trade deficit. 

And the Huawei situation could easily escalate, putting pressure at home on the Chinese dictator to act.

Meng Wanzhou, the chief financial officer of Huawei, was arrested in Canada. 

If nationalistic tempers flare, the relationship could suffer. 

In previous tense moments, a thaw has taken time.
When the United States accidentally bombed China’s embassy in Belgrade, Serbia, in 1999, the deaths of three Chinese citizens personalized the episode and triggered a wave of anger and indignation against the United States. 

The chill to Sino-American relations lasted for months, even though the Chinese leader at the time, Jiang Zemin, had previously taken a friendlier approach with the United States than Xi.
The Huawei executive, Meng Wanzhou, was arrested in Canada on Dec. 1 at the behest of American authorities, who claimed she deceived financial institutions and caused them to violate sanctions against Iran. 

“If Meng is extradited to America, then it will be difficult for the government to control the public’s anger,” Tu said.
President Trump and his top trade advisers were pleased by the tenor of his dinner with Xi in Buenos Aires. 

The Chinese dictator was deeply engaged in the conversation, eager to convince the Americans that he was willing to go further in accommodating their grievances than any of his predecessors.
Along with the agreement in Buenos Aires, China’s leaders are also preparing a series of moves to open up the economy to more trade and foreign investment, an overhaul timed to the 40th anniversary later this month of the country’s initial post-Mao economic reforms. 

Such moves, like further tariff reductions, would provide Xi an opportunity to introduce market-friendly measures without seeming to give in to American pressure.
It’s unclear what will satisfy the administration — and more important, President Trump.
Mnuchin has pushed for an agreement that obtains some concessions quickly, in order to reduce the potential economic fallout of an intensified trade war. 

Trump, concerned about the volatility in the stock markets, wants to get a big deal done, while also avoiding anything drastic that would damage his relationship with Xi, according to several officials with direct knowledge.
But Trump’s economic advisers are also watching China with a high level of caution. 

Some, like Mr. Lighthizer, the top negotiator in the talks, are highly doubtful that China will do anything more than is necessary to remove the threat of new tariffs.
Beijing has a history of making promises it doesn’t keep. 

The recent moves by China would provide superficial wins for the Trump administration, without requiring Beijing to substantially change anything.

The FAW-Volkswagen plant in Foshan, Guangdong Province, China. Many multinational companies are reconsidering their reliance on the country.

China has expressed a willingness to cut tariffs on American cars to 15 percent, from 40 percent. 

But that’s what China already charges the rest of the world; the higher tariffs were merely a retaliatory measure imposed after the United States started a trade war. 

And China still maintains a 16 percent value-added tax that applies to all cars, including imported ones.
When China’s cabinet issued updated mandates on Monday for local governments, one of President Trump’s bugaboos was no longer on the list: Made in China 2025, a state policy to turn the country into a high-tech superpower. 

Instead the list outlined government backing for industrial upgrading and “technological transformation,” a more banal-sounding if similar plan.
David Malpass, Treasury’s under secretary for international affairs, said during a congressional hearing on Wednesday that the Trump administration would not accept promises from China without verification. 

“The proof is in the pudding,” said Mr. Malpass, who has engaged in midlevel negotiations with the Chinese. 

“There’s a desire within the discussions to have specificity, to have firm timelines and deadlines and enforceable kinds of conditions.”
Wilbur Ross, the Commerce secretary, said on CNBC on Wednesday that the Made in China initiative had provoked backlash from other countries but that he did not believe China was doing away with the program. 

“If you’ll search the recent clips, you’ll find they haven’t been talking that much about it,” Mr. Ross said. 

“That doesn’t mean they’ve dropped it.”
As the talks progress, China’s hand could ultimately be forced by economic weakness.
It’s hard to tell exactly how bad the economy has gotten in China. 

Economists regard Chinese data as unreliable, and Beijing keeps a tight grip on information. 

But some sectors, like real estate and cars, indicate the plunge is getting steeper with each passing month.
Car sales plummeted faster this autumn than during the global financial crisis, an abrupt downturn that auto industry leaders attribute to a crumbling of business and consumer confidence triggered mainly by the trade war. 

Many multinationals are reconsidering their heavy reliance now on China, endangering the country’s ability to attract plentiful foreign investment and know-how in such industries.
“Without Volkswagen, China would not be No. 1 in auto production today,” said David Li, a prominent Tsinghua University economist, at a conference that the university hosted on Sunday to review policy lessons from the last 40 years, since China opened up after the death of Mao.
The trade war, the sharp slowing of the economy and the prospect of diminishing foreign investment have also precipitated drops in China’s stock market and currency this year. 

Those, in turn, appear to have weakened Xi’s popularity, at least within the country’s political and economic elite in Beijing and Shanghai. 

Complaints about his management, very seldom heard six months ago, have become unusually common in private conversations.
For Xi, balancing those internal and external pressures will be critical as China enters the next phase of negotiations. 

Whatever additional leverage the United States enjoys in the current talks is predicated on the threat of tariffs, and Xi, like Chinese negotiators before him, still believes President Trump will blink, said Derek Scissors, a China scholar with the American Enterprise Institute in Washington.
The Huawei incident “doesn’t give Trump any additional leverage. The tariffs do, whether you think they are a good idea or not,” Mr. Scissors said. 

“And, based on what President Trump has done so far, the Chinese think that we ultimately chicken out just like we have done every other time.”

Sina Delenda Est

The United States is finally confronting China’s economic aggression

By Josh Rogin

U.S. Trade Representative Robert E. Lighthizer testifies on trade policy before the House Ways and Means Committee at Capitol Hill on March 21. 

Lost in last week’s coverage of tariffs and trade deficits was the Trump administration’s landmark decision to confront China’s unfair and illegal practices that threaten our economic security.

It’s the opening salvo of the key economic battle of the 21st century and part of a worldwide struggle the United States must lead.
The Chinese government’s strategy to amass control of critical technologies while undermining the rules-based trade system built by the United States and its partners will be hard to combat. 

Exactly how the administration plans to tackle the task remains unclear. 

But the implications of that long-term project reach far beyond the short-term battle over tariffs or deficits now brewing between Washington and Beijing.
The Trump administration is now basing U.S. policy on a recognition that the massive scale of China’s technology transfer effort cannot be addressed with the usual levers of trade policy. 

That means the United States and other countries will have to respond with new tools and a new attitude.
“Technology is probably the most important part of our economy,” U.S. Trade Representative Robert E. Lighthizer said Thursday. 

“And we concluded that, in fact, China does have a policy of forced technology transfer; of requiring licensing at less than economic value; of state capitalism, wherein they go in and buy technology in the United States in non-economic ways; and then, finally, of cybertheft.”
Lighthizer released the results of a months-long investigation by his office meant to form the basis of the new U.S. response. 

Its findings confirm what academics and the private sector have long known. 

His office estimates that Chinese illicit practices rob the U.S. economy of at least $50 billion annually. 

A bipartisan commission chaired by retired Adm. Dennis Blair and former Utah governor Jon Huntsman estimated the loss to the U.S. economy due to intellectual property theft overall to be between $225 billion and $600 billion annually. 

The commission’s 2017 report named China as the “principal IP infringer.”
The administration plans new tariffs and will bring a case against China at the World Trade Organization regarding discriminatory licensing practices. 

But officials told me that the real game changer is yet to come, saying that the administration will soon announce restrictions on Chinese investment in a range of technology and other critical sectors.
While the specific actions haven’t been finalized, expect executive actions aimed at preventing Chinese state-controlled companies from swallowing up U.S. technology firms, stopping U.S. companies from handing over key technologies to China and working to persuade other Western countries to do the same.
The Senate is sitting on legislation to reform the Committee on Foreign Investment in the United States to cover new industries and fix loopholes. 

The administration is already increasing actions to prevent Chinese firms from purchasing U.S. companies crucial to our technological infrastructure or that control personal information of Americans.
Make no mistake, these are deviations from normal practice to single out China — for good reason. For one, Chinese firms are increasingly connected to the Chinese government, serve the political objectives of the Chinese Communist Party and are the beneficiaries of massive subsidies and protectionist benefits given by Beijing. 

In essence, China has politicized its entire economy.
There was a belief that China would develop a private economy that would prove compatible with the WTO system. 

Chinese leadership has made a political decision to do the opposite. 

So now we have to respond.
“The Chinese are engaged in a fundamental attack on the principles of free trade,” said Derek M. Scissors of the American Enterprise Institute. 

“They are not close to free traders, so we are not obligated to abide by free trade. We are overdue to confront China on this.”
Given the stakes and risks, the next U.S. moves must be smart and strategic. 

If this really is the economic battle of the future, the United States needs allies in the fight. 

Alienating partners with tariffs on steel and aluminum at the start of this journey was a counterproductive distraction. 

European countries face the same threat from China but need to be brought along via positive U.S. engagement. 

Persuading them to join America’s new WTO case would be a good start.
Overreach is also a risk. 

Some Chinese investment in the United States is positive, and defining which sectors to protect is key. 

Our issue is with the Chinese Communist Party.
There must also be a dialogue with Beijing to offer it the opportunity to change its behavior, abide by its international commitments and build reciprocity into the U.S.-China economic relationship.
This new effort to prevent China from unfairly moving to dominate the industries of the future is complex, risky and sure to have unintended consequences that will have to be managed over time. But the future of our economy depends on its success.