China keeps tight grip on trade imbalance
By Damon Cline
President Donald Trump has said that China’s economic treatment of America is akin to personal assault.
“We can’t continue to allow China to rape our country,” he told an Indiana crowd in May. “That’s what they’re doing. It’s the greatest theft in the history of the world.”
Although U.S. consumers have benefitted from an abundance of cheap Chinese-made goods, the trade relationship with the world’s second-largest economy has been mostly “take” and very little “give” – as evidenced by the U.S.-China trade deficit, which hit a record $367 billion in 2015, up from $343 billion the previous year.
Some of the imbalance with the world’s most populous nation stems from its low standard of living, in which its huge population serves as the world’s low-price workshop. But the communist nation also manipulates free-market principles – up to and including the deliberate undervaluation of its own currency – to give it an unfair advantage.
Government data illustrate the situation:
• Trade is mostly one-way: The United States receives 18 percent of all Chinese exports, but China gets just 7 percent of American exports.
• China has high barriers: America is slapped with Chinese tariffs of 9.7 percent and 5 percent on agricultural and non-agricultural goods, respectively. But when Chinese goods enter the U.S., the tariffs are just 2.5 percent and 2.9 percent.
• China has two sets of rules: Chinese firms investing in the U.S. benefit from American rule of law and consistent regulation. American companies investing in China have testified they faced corruption, hostile regulation and needless bureaucratic delays.
• China has no respect for intellectual property: The United States Trade Representative ranks the People’s Republic of China as consistently among the worst intellectual property offenders, and a 2013 bipartisan commission report estimates the nation’s theft of American technology and innovation costs the U.S. economy $300 billion a year.
“Their whole telecom industry is built on theft,” notes Derek Scissors, a resident scholar at the American Enterprise Institute. “That high-speed rail industry they’re bragging about? It’s all based on theft.”
• China manipulates its currency: China ensures its exports remain cheap and America’s exports remain expensive by purchasing U.S. Treasury notes to prop up the dollar when it loses value against the yuan. The constant buying has made China America’s largest foreign lender for years (though it recently lost the distinction to longtime No. 2, Japan).
• China’s economic data are untrustworthy: Statistics on unemployment, inflation and per-capita income are controlled by the Communist Party.
Chinese corporations propped up by state-owned banks are essentially “zombie companies” according to Capital Formation Counselors, Inc., a Florida-based economic consulting firm.
“(China’s) prosperity may have been primarily funded by untraceable internal debt, as one financial entity funds another without a valid external audit,” the firm said in a recent report. “…Many banks in China are full of loans that cannot be repaid and are being rolled over and are not written off.”
All this imbalance comes with a cost: America’s debt to China – $1.115 trillion – is 29 percent of all our foreign-owned public debt. In other words, nearly one-third of America’s financial obligations are to a non-ally seeking to become the world’s dominant superpower.
There also is a price to be paid for getting 90 percent of our laptops, 70 percent of cellphones and 40 percent of our apparel from China: domestic jobs. U.S. manufacturing jobs declined 34 percent between 1998 and 2010 as companies who couldn’t compete either went out of business or outsourced jobs to lower-cost markets – including China.
China’s unabashed mercantilism has enabled state-controlled steel and coal industries to supply half the world’s consumption. Perhaps most telling is the latest Fortune Global 500 list, where China trails only the U.S. in the number of corporations.
America’s trade deficits are not new – the U.S. has had one every year since 1975. But the growing imbalance with China since its entry into the World Trade Organization in 2001 poses a national security risk that must be addressed by the new administration.
Scissors, an expert on China trade relations, said intermediaries such as the World Trade Organization cannot be counted on to bring China into compliance. Bold, but strategic, policymaking by the Trump administration is the only solution.
“We’re not going to get the Chinese to change by talking to them. There is 20 years of evidence that shows that does not work,” he said. “They can’t be talked into anything; they have to be shoved into it.”
Damon Cline is business editor of ‘The Augusta Chronicle’ in Georgia.
OF U.S. FOREIGN-OWNED PUBLIC DEBT IS OWNED BY CHINA
The reform-minded China that the Clinton and Bush administrations helped welcome into the World Trade Organization in 2001 is worlds apart from modern-day Beijing.
“They stopped reforming in 2002 when they changed their government,” says Derek Scissors, a resident scholar at the American Enterprise Institute. “We were dealing with one group of people and we ended up with a different group of people. That turned out to be the biggest mistake of U.S. trade policy, maybe ever.”
Derek Scissors advocates chipping away at Beijing’s domestic industry subsidies and focusing on its most egregious trade violation: intellectual property theft.
Targeted measures, as opposed to blanket tariffs, would ensure that only Chinese firms that break the law are punished, he said.
Scissors said the administration should press international institutions, such as the World Bank, to adopt a two-tier system giving countries that provide transparent economic data more consideration than those that do not.