[SCMP Column] Change of Fortune Looms

October 03, 2017

If trade conflict erupts between China and the United States in the coming year, it will certainly not be for want of both sides trying to keep the peace.

Beyond the working level shuttle diplomacy that has been humming since Xi Jinping’s April summit discussion with Donald Trump in Mar a Lago, visits to Beijing over the past week by Commerce Secretary Wilbur Ross and Secretary of State Rex Tillerson have lifted dialogue to the highest level. Exchanges seem likely to intensify through the coming month to a crescendo in November when Trump and Xi might actually meet three times – at the APEC Leaders’ meeting in Da Nang in Vietnam; at the ASEAN leaders’ 50th anniversary celebrations in Manila; and bilaterally in Beijing too.

If the differences and tensions between China and the US were not so obvious and fraught, one could be forgiven for thinking there was some serious passion at work.

While Wilbur Ross’s post-Beijing briefings in Hong Kong were in general terms predictably tough – calling for better market access for US companies, less Chinese protection for domestic champions, and better respect for US intellectual property rights – they were also carefully conciliatory. He talked of the “strong personal relationship” between Xi and Trump, and said he was optimistic that the two could by November agree on “specific deliverables” that would quieten US concerns over China’s alleged unfair trade practices.

You could almost feel upbeat – until you try to reconcile Wilbur Ross’s comments with those of Robert Lighthizer, Trump’s Trade Representative, at the Centre for Strategic and International Studies (CSIS) in Washington just a week earlier.
“I believe that there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China,” he opened: “The sheer scale of their coordinated efforts to develop their economy, to subsidise, to create national champions, to force technology transfer, and to distort markets in China and throughout the world, is a threat to the world trading system that is unprecedented.”

He said the World Trade Organisation was “not designed to successfully manage mercantilism on this scale.”

Lighthizer could have been writing a new preface to his colleague Peter Navarro’s 2006 book The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

Lighthizer’s CSIS talk deserved close attention not simply because of the insights he provided into the logic of the current administration’s trade policies, but because of the alarmingly crude naivity of his and the administration’s views on trade. One has to remember he is not a trade expert, but rather an expert on fighting legal battles for one of the US’s strongest and most protectionist trade lobbies – the domestic steel industry.

He forgets that the world’s trade rules – and the architecture of most other international institutions created from the ruins of the second world war – were set largely by the US, underpinned by the US legal system, and forged with US business interests at heart. He forgets that for most economies worldwide gigantic US corporations have over the past six decades built a dominant – even impregnable – position in global markets confident of protection in a home market that remains the largest and richest in the world.

For him and others in the Trump administration to argue today that the trade playing field is unfairly skewed in favour of foreign countries, and that US companies can win any competition if only market conditions are “fair” is to be profoundly hypocritical. It is also to be deaf and blind to the anxieties felt over sixty years by the thousands of small companies in small markets who have struggled to survive as markets have been opened and giant US companies have moved in to compete.

Wilbur Ross and Robert Lighthizer are quite right that China remains more protectionist than the US, and that it fights hard – and uses subsidies – to protect and build local champions until they have developed the scale and the robustness to survive and compete in the face of the world’s most formidable companies – many of whom have in their time benefited from protections of their own.

The paradox here is that China is perhaps the only economy in the developing world with the scale, focus and resources to fight this battle with any hope of success. This is of course a reason why US companies, and the US government, are so concerned. A hegemon is rarely able to perceive itself as anxious others perceive it.

The reality for many of us is that for a large number of reasons, China is in the process of recalibrating the balance of world political and economic power. It has the will and the capacity to change the “rules of the game” in order to lift the living standards of its huge and still relatively poor population.

So it is our good fortune that China has, since Deng Xiaoping rose to power in 1978, chosen to reengage the outside world on our terms, learning and accepting the overall merits of the Bretton Woods system we set up over six decades ago – our rules, our architecture, our institutions.

It may be true that it remains more protectionist than the US, but this misses the point: the direction of change in the Chinese economy is powerfully positive, and seems set to remain so. As Trump flirts with a perceived need for protection, China provides daily proof of the strong net benefits that have come from opening up. China’s leaders today recognise the merits of open markets, and of exposing their domestic companies to local and international competition. But they have the temerity to insist that they and not us are the best judges of the pace of manageable change.

I have to hope that the intensity of current trade exchanges between top US and Chinese officials suggests that at least some in the US administration recognise the positive direction China is travelling in, and that at least some in the Chinese administration recognise that you have to ignore much of the bellicose rhetoric coming from Washington. China is going to become stronger. And it is going to want to change some of the rules. For the impatient among us, this opening process is slower than we would like. We need to get comfortable with this. And that includes the US.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own. 
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