Wariness of a trade war between the United States and China has been rattling investors worldwide. While proponents of free trade will continue to insist that there can be no winner in an all-out trade war, they also are well aware that the current playing field is hardly even. The administration of President Trump insistence on reciprocity in trade enjoys support from free traders and protectionists alike. The problem, though, lies in the United States side placing far too much emphasis on reducing the trade deficit and not enough on investing in future United States competitiveness.
Barry Wood, a Washington writer and broadcaster. His new book is Exploring New Europe, a Bicycle Journey stated that instead of putting up trade barriers to protect select United States industries, the United States government should learn from Asia’s recent past by investing strategically in key sectors that will strengthen the nation’s economic foundation. That is certainly the approach China is taking with its Made in China 2025 plan. It identifies 10 key sectors as critical for the nation’s future, including biotechnology, robotics, IT and aerospace.
Barry Wood noted that the core driver of the strategy is an acknowledgement that China no longer wants to compete in low-skill manufacturing industries. Moving up the value-added chain is especially pressing as China is already losing out in sectors such as textiles and footwear manufacturing to lower-cost countries including Thailand and Vietnam. Industrial policies are hardly unique to China or even to Asia. One of the most recent notable government-driven plans is from Germany and its Industry 4.0 plan. The initiative was adopted in 2013 in an effort to integrate technology and manufacturing to enhance efficiency as well as competitiveness. Chancellor Angela Merkel embraces it as a means to ensure that Germany remains a leading economic power. Japan’s history of close relations between the government and the private sector, as well as prioritizing resources to targeted areas also remains a lesson in how public policy can bolster growth.
According to Shihoko Goto, Senior Associate for Northeast Asia at the Woodrow Wilson International Center, currently, the United States remains the undisputed global leader in technology and more broadly, in the services sector. Indeed, it has a global trade surplus of 262 billion dollar in the service sector, thanks to its competitive edge in 21st century industries such as telecommunications, information technology and financial services. But the question is whether it can remain in the pole position without proactive support from Washington. After all, other major economies are stepping up their own interventionist policies to challenge United States leadership in technology, innovation and the service sectors.
Yet, instead of taking measures to protect and further the United States lead in growing industries of the future, Washington has traditionally been reluctant to take the initiative to pursue industrial policies. Echoing the steps taken in the 1980s and 1990s, when the target was Japan rather than China today, the United States focus is on taking protectionist measures to salvage the United States manufacturing sector and reduce the trade deficit in goods, rather than to expand the surplus in services still further.
Shihoko Goto noted that “Phase One” of the United States-China trade agreement that is being signed in Washington recently is a step forward but it leaves many in the United States frustrated. Enforcement is one major concern. The 80-plus page agreement commits China not only to boost purchases of United States agricultural products, but to halt technology transfers required under many joint venture deals with United States companies.
Robert Lighthizer, the United States Trade Representative, says yes, the Chinese will actually make good on those promises. But he concedes that the extent to which China keeps its promises depends on whether reformers or hardliners hold the reins of power in Beijing. Should the Chinese fail to comply, United States tariffs, which are to be gradually eliminated under the “Phase One” deal, can be reactivated.
According to Robert Lighthizer, left out for now are big issues involving high tech, subsidies and the trade distorting “Made in China 2025” industrial policy. Carnegie Mellon professor Lee Branstetter sees the China 2025 initiative as Beijing’s pursuit of “an aggressive industrial policy that seeks to exclude, expropriate, and overtake foreign firms.“ China, Branstetter says, “remains the most digitally protectionist major economy in the world.” China, of course, does not play fair, as any first-time visitor to China quickly understands when he opens his laptop.
China’s Great Fire Wall means that Google is not accessible. Similarly, there’s no Twitter, Facebook, gmail, YouTube, Wikipedia, New York Times or Washington Post. Pat Bajari, Amazon’s chief economist, says China’s data localization law unfairly prohibits the export of data. Last April, Amazon eliminated third party selling on its Chinese website and remains a player on the Chinese internet.
Robert Atkinson, president of the Washington-based Information Technology and Innovation Foundation, credits President Trump with blowing the whistle on unfair Chinese practices. Those had been effectively ignored by presidents Obama and the second George Bush. “He has awakened America to the Chinese threat and that game changer will endure no matter who wins the 2020 presidential election.”
Daniel Russel of the Asia Society Policy Institute calls both presidents Trump and Xi Jinping economic nationalists. “There are parallels,” he said, between Trump’s “Make America Great and Xi’s China Rejuvenation.” Both narratives, he says, are nationalistic and make technological leadership a top priority. Daniel Russel noted that the path to a broader, more significant trade deal is obviously difficult. Not only are both countries vying for global leadership. They also operate on the basis of strikingly different political structures. That makes the “Phase One” deal significant. Washington and Beijing are finding ways to communicate.
The real question is trust and whether China and the United States will play by established trade rules. There are worries that they may end up making a deal that fits only their own bilateral interests, to the detriment of the global trading system. At a minimum, United States-China trade is being rebalanced, correcting some of the inequities that have long favored China.