No one has written a decent article explaining USA's perspective on trade vis a vis China, so I'll throw my hat in the ring. As with any negotiation, whether China "wins" depends on its ability to ascertain USA's ulterior motives. (Lawyers know no matter how specific the final language of an agreement, there is always room for interpretation.)
Robert Lighthizer, the U.S. Trade Representative, wants to obviate China's usual currency devaluation in order to stimulate its domestic economy. Stated another way, the U.S. is trying to increase domestic Chinese consumer consumption by reducing the two countries' trade deficit. Why is this American objective potentially destabilizing for China?
With so much else at stake, American "experts" erroneously emphasize the financial value of China's promises of agricultural purchases, believed to total 32 billion USD over the next two years. In reality, America's main goals are to 1) stop China's ability to fluctuate its currency unilaterally, thus limiting its power to assist export-oriented businesses (whether SOE or otherwise); 2) stop China's "free" technological gains through IP transfers, including software code, thereby increasing the cost of competing with USA corporations; and 3) stop China's alleged procrastination in reforming its judicial system, which, due to an alleged lack of independence, appears to tolerate a laissez-faire attitude towards IP violations. Thus, China's agreement to purchase American agricultural products are the Republican Party's opening salvo aimed at advancing a Trojan Horse reshaping China's entire economy.
To understand the challenges in achieving viable compromises, remember that USA's economy is consumer-driven. According to some sources, consumer spending comprises a whopping 68% of America's entire economy. A consumer-driven economy allows for higher individual debt, more private enterprise, and less government interference. Though much of China's recent GDP growth is from consumer spending, its path from "developing" to "developed" status has been through non-consumer infrastructure spending and exports.
China's success thus far should not be overlooked. From Singaporean professor Danny Quah:
I'll say it again: because China has focused on infrastructure and other government-driven projects rather than domestic consumerism, it is just now trying to move up the consumer supply chain. (It has already moved to the top in ports, roads, trains, solar energy, etc.) In fact, China is well-positioned to compete in the global consumer market because its per capita GDP recently reached the "magic" 10,000 USD number, at which point most people, especially younger people, feel comfortable trying new items and upgrading personal preferences (e.g., pork to beef, the latest smartphone, etc.).
For its part, USA is trying to impede China's shift into USA's economic specialty of consumerism through tariffs (hurting China's exports), technological blocks (hurting Huawei), legal mechanisms (using Western countries' court systems to threaten criminal charges against Chinese executives), and manipulating oil prices ("In 2018, China had record oil and gas imports and remains the number one crude oil importer in the world after surpassing the United States in 2017 and is the number two natural gas importer, behind Japan").
I see little chance of success for the United States in the short-term because China still has numerous options (Manila and Jakarta ports instead of HK and Shanghai) and alternate suppliers (oil and otherwise), allowing it to soften the blow of any US trade restriction. More importantly, China's government regularly publishes five to ten year economic plans, and if an American objective runs contrary to stated governmental aims, it seems unlikely China is willing to lose face by acceding to American demands.
To its credit, China knows it currently lacks expertise building globally recognized, consistent brands and has failed to replicate other countries' branding successes, whether Japan or South Korea. (I dislike K-pop, but South Korea's outsized influence in Asia's entertainment scene shows remarkable prowess in generating consumer demand.) In Chinese-majority Singapore, I have seen zero Chinese Luckin Coffee stores but plenty of Taiwanese bubble tea shops and American Starbucks, indicating China has yet to operate comfortably within other countries' regulatory systems.
With so much else at stake, American "experts" erroneously emphasize the financial value of China's promises of agricultural purchases, believed to total 32 billion USD over the next two years. In reality, America's main goals are to 1) stop China's ability to fluctuate its currency unilaterally, thus limiting its power to assist export-oriented businesses (whether SOE or otherwise); 2) stop China's "free" technological gains through IP transfers, including software code, thereby increasing the cost of competing with USA corporations; and 3) stop China's alleged procrastination in reforming its judicial system, which, due to an alleged lack of independence, appears to tolerate a laissez-faire attitude towards IP violations. Thus, China's agreement to purchase American agricultural products are the Republican Party's opening salvo aimed at advancing a Trojan Horse reshaping China's entire economy.
To understand the challenges in achieving viable compromises, remember that USA's economy is consumer-driven. According to some sources, consumer spending comprises a whopping 68% of America's entire economy. A consumer-driven economy allows for higher individual debt, more private enterprise, and less government interference. Though much of China's recent GDP growth is from consumer spending, its path from "developing" to "developed" status has been through non-consumer infrastructure spending and exports.
In absolute terms, the average person in the bottom half of the US income distribution today is worse off than the average person in 1980 in the US... [but] the people at the bottom half of China's income distribution today are four times better off than they were 30 years ago.America desires less restricted markets within China and a less export-oriented economy because domestic Chinese consumption would tilt towards USA/EU products. In other words, it wants to rewrite the rules of the game to favor its own economic model (domestic consumer spending, privatization) over China's (government-driven growth that has taken 750 to 850 million Chinese out of poverty). I don't fault the U.S. Trade Representative's approach. As of today, American Nike is far better than Chinese LiNing, American Ford far better than Chinese Geely, EU-Unilever and EU-Nestlé far better than any Chinese company, and so on. Why the gap in quality and reputation?
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| From World Bank |
I see little chance of success for the United States in the short-term because China still has numerous options (Manila and Jakarta ports instead of HK and Shanghai) and alternate suppliers (oil and otherwise), allowing it to soften the blow of any US trade restriction. More importantly, China's government regularly publishes five to ten year economic plans, and if an American objective runs contrary to stated governmental aims, it seems unlikely China is willing to lose face by acceding to American demands.
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| Over 1,000 pages on governance. |
Incredibly, replicating and improving global supply chains has proven easier than building products everyone wants and can access within those supply chains. If China has to divert spending that could otherwise be used to attract competitive ad agencies, international legal experts, and other fundamental blocks of consumerism, then it risks being left behind at the exact moment it opens markets to foreign competition and its own consumers can afford to differentiate between domestic and international brands regardless of tariffs.
The West beat the Soviet Union not because America's approach towards human rights or privacy was fundamentally different--post-Snowden and Church Committee investigations, we know both West and East are and were surveillance and military-driven. Yet, despite more similarities than differences, the West succeeded because it was able to create better stories by leveraging innovation through the private sector and parlaying substantial development risk onto private banks. (See, for example, USA's Community Reinvestment Act of 1977, through which the federal government can allow or disallow bank branch expansion based on geographic and income-based diversity of loans.)
Once upon a time, Ronald Reagan and the West could advance a credible anti-Communist narrative because America's diversity, refugee policies, private sector loans, oil access, and bankruptcy rules trumped its inconsistencies. Rather than worry about the U.S. Trade Representative's non-numerical demands, China should be asking itself the following questions: What will China's narrative be? And will it be able to create a stable and credible one if, moving forward, it is forced to increase the value of its currency to support greater domestic consumer demand?
© Matthew Mehdi Rafat
Bonus: A few caveats:
First, a weak or weaker currency does not guarantee a country will export more than it imports. Indonesia--a country with oil, gold, natural gas, and timber--has a relatively weak currency. Bloomberg News reported on December 16, 2019 that Indonesia's "imports of consumer goods surged and exports contracted for a 13th straight month."
Second, the broad language disclosed so far reminds me of USA's most recent attempt to mediate between North and South Korea. (Regarding China and USA, what exactly are the components of "high-standard commitments to refrain from competitive devaluations" & enforcement "mechanisms"?) A year later, nothing truly substantive has changed between North and South Korea despite the hype surrounding diplomatic efforts; furthermore, as of last month, according to Reuters' Joyce Lee and Ju-min Park, "The United States is 'very actively' trying to persuade North Korea to come back to negotiations... as a year-end North Korean deadline for U.S. flexibility approaches."
Similarly, I predict these American-Chinese talks will be much ado about nothing and another chapter in America's habit of overreaching post-Vietnam-War. Also, I'd be lying if I said I wasn't curious to see if China tries to use its purchasing commitments to influence America's 2020 elections. Interesting times, eh?
President Xi Jinping (December 31, 2019):
"Human history, like a river, runs forever, witnessing both peaceful moments and great disturbances."
The West beat the Soviet Union not because America's approach towards human rights or privacy was fundamentally different--post-Snowden and Church Committee investigations, we know both West and East are and were surveillance and military-driven. Yet, despite more similarities than differences, the West succeeded because it was able to create better stories by leveraging innovation through the private sector and parlaying substantial development risk onto private banks. (See, for example, USA's Community Reinvestment Act of 1977, through which the federal government can allow or disallow bank branch expansion based on geographic and income-based diversity of loans.)
Once upon a time, Ronald Reagan and the West could advance a credible anti-Communist narrative because America's diversity, refugee policies, private sector loans, oil access, and bankruptcy rules trumped its inconsistencies. Rather than worry about the U.S. Trade Representative's non-numerical demands, China should be asking itself the following questions: What will China's narrative be? And will it be able to create a stable and credible one if, moving forward, it is forced to increase the value of its currency to support greater domestic consumer demand?
© Matthew Mehdi Rafat
Bonus: A few caveats:
First, a weak or weaker currency does not guarantee a country will export more than it imports. Indonesia--a country with oil, gold, natural gas, and timber--has a relatively weak currency. Bloomberg News reported on December 16, 2019 that Indonesia's "imports of consumer goods surged and exports contracted for a 13th straight month."
Second, the broad language disclosed so far reminds me of USA's most recent attempt to mediate between North and South Korea. (Regarding China and USA, what exactly are the components of "high-standard commitments to refrain from competitive devaluations" & enforcement "mechanisms"?) A year later, nothing truly substantive has changed between North and South Korea despite the hype surrounding diplomatic efforts; furthermore, as of last month, according to Reuters' Joyce Lee and Ju-min Park, "The United States is 'very actively' trying to persuade North Korea to come back to negotiations... as a year-end North Korean deadline for U.S. flexibility approaches."
Similarly, I predict these American-Chinese talks will be much ado about nothing and another chapter in America's habit of overreaching post-Vietnam-War. Also, I'd be lying if I said I wasn't curious to see if China tries to use its purchasing commitments to influence America's 2020 elections. Interesting times, eh?
President Xi Jinping (December 31, 2019):
"Human history, like a river, runs forever, witnessing both peaceful moments and great disturbances."
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