Trump’s trade ban: Ridiculous or rational?

Making major headlines over the past fortnight, President Donald Trump has accused China of unfair trading practices, sparking fear of a trade war with his threats of a big ‘fine’ on China.[1] However, these are not just wild accusations from a president known for his ‘alternative facts’. Trump’s accusations are the latest in a long string of allegations against China for unfair trade behaviour. In 2016, President Barack Obama launched a formal complaint against Beijing’s export restrictions with the World Trade Organisation (WTO). Similarly, in 2017 the EU singled China out for distorting the market with excessively cheap exports.[2][3] Although this could be the bitter response of Western countries to the colossal shift in economic and geopolitical power from the West to the East, it seems there is some truth to these allegations. With the potential for a devastating trade war, it is important that we explore the causes of these allegations.

China’s Trade Practices

China’s attitude to free trade has always been cautious. Wary of its past being dominated by various foreign powers, it has been very selective about lowering trade barriers. Although its most recent 2017 Negative Investment List shows that significant barriers have been relaxed for services, manufacturing, and mining investment, China remains relatively closed compared to the rest of the world.[4] The Chinese Communist Party’s (CCP) heavy-handed intervention of the in the economy tends to advantage local firms at the detriment of foreign firms. From conventional methods such as tariffs or foreign investment restrictions, to less conventional barriers such as low-interest government loans and forced technology transfers, the CCP confers artificial competitive advantages to domestic firms whilst also violating one of the World Trade Organisation’s (WTO) core principles of trade- reciprocity.[5]

Although foreign countries have been forgiving in the past about China’s lack of reciprocity, as China’s economic power increases, foreign companies and countries are increasingly demanding a level playing field. Chinese firms gain an incredible advantage from operating in a closed domestic market but selling to an open international market. Currently China operates under a very lucrative double standard. Whilst restricting foreign investment into the country, China is a heavy investor itself, currently holding around 11% of all FDI assets in the world, second only to the US. Although this investment is largely comprised of infrastructure in developing countries, a significant portion actually goes towards developed countries. Notable Western companies such as Volvo, the General Electric Appliance Business and even Australia’s very own Hoyts Cinemas have been bought up by Chinese companies in recent years.[6][7]

These acquisitions are not cause for complaint by themselves, foreign investment provides the capital to expand existing businesses, access to new markets and allows for the transfer of skills and technology. The reason most countries complain is because many of these Western companies did not have the opportunity to obtain their Chinese counterparts due to trade restrictions.  For instance, in an open market, U.S. pork producer Smithfield, with its superior technology and food-safety procedures, might have taken over Shuanghui and expanded into the Chinese market if it were not for investment restrictions. However, as this was not the case, if Smithfield wanted to expand into China it had no choice other than to be acquired by Shuanghui.[8] If China were to open its markets, this would allow international expansions to happen in the most efficient way possible. This will still allow Chinese firms to acquire foreign ones, but it will also mean that foreign firms can expand into China, something that will be beneficial for all.

There are already positive signs that this will happen. During the World Economic Forum Annual Meeting last year, Xi Jinping gave a spirited defence of free trade and cautioned against the dangers of protectionism and trade wars.[9] More importantly, Vice-Premier Han Zheng has recently pledged to further open up the economy, promising reforms to protect intellectual property rights and to treat domestic and foreign firms equally.[10] Although this is not concrete policy, it certainly signals that China knows that free trade is in its interests and is willing to make changes. For this reason, it is important that countries avoid inflammatory rhetoric and actions. Unilaterally threatening an economic power like China only risks a trade war with no winners. Going forward, we should encourage strong international cooperation and well-negotiated trade agreements. By doing this, there is hope for an equitable solution for all countries involved.

References

[1] Mason, J. (2018, January 18). Trump considers a big ‘fine’ over china intellectual property theft. Reuters. Retrieved from: https://www.reuters.com/article/us-usa-trump-trade-exclusive/exclusive-trump-considers-big-fine-over-china-intellectual-property-theft-idUSKBN1F62SR

[2] Donnan S, Hornby L, Beesley A, (2016, July 16). Obama steps up trade battle with China. Financial Times. Retrieved from: https://www.ft.com/content/fed9f136-4914-11e6-8d68-72e9211e86ab

[3] Blenkinsop, P. (2017, December 21). EU singles out China as distorted state-run economy. Reuters. Retrieved from: https://www.reuters.com/article/us-usa-trump-trade-exclusive/exclusive-trump-considers-big-fine-over-china-intellectual-property-theft-idUSKBN1F62SR

[4] KPMG, (2017). New China negative list for foreign investment modifies sectoral restrictions. Retrieved from https://home.kpmg.com/cn/en/home/insights/2017/06/china-tax-alert-21.html

[5] Lawder, D. (2017, March 31). U.S. trade barriers report slams China on overcapacity, tech transfer. Reuters. Retrieved from: https://www.reuters.com/article/us-usa-china-trade-barriers/u-s-trade-barriers-report-slams-china-on-overcapacity-tech-transfer-idUSKBN1720GL

[6] Love Money. (2016). 32 famous Western brands bought by the Chinese. MSN Money. Retrieved from: https://www.msn.com/en-nz/money/companies/32-famous-western-brands-bought-by-the-chinese/ss-AAkCT9X

[7] Ryan, F. (2015, June 3). Hoyts sold to China cinema giant Wanda. The Australian Business Review. Retrieved from: https://www.theaustralian.com.au/business/news/hoyts-sold-to-china-cinema-giant-wanda/news-story/31b6c626ab4987242c23388af6b1d91d

[8] Dollar D. (2016) Is the Chinese economy closed?. East Asia Forum; Retrieved from:   HYPERLINK “http://www.eastasiaforum.org/2016/07/27/is-the-chinese-economy-closed/”   http://www.eastasiaforum.org/2016/07/27/is-the-chinese-economy-closed/

[9] Parker, C. (2017, January 17). China’s Xi Jinping defends globalization from the davos stage. World Economic Forum. Retrieved from: https://www.weforum.org/agenda/2017/01/chinas-xi-jinping-defends-globalization-from-the-davos-stage/

[10] Eijnsight. (2018). China vows to further open up economy, protect IP rights. Eijnsight. Retrieved from http://www.ejinsight.com/20180326-china-vows-to-open-up-economy-wider-protect-ip-rights/

Image source: London School of Economics and Political Science 2007 Misc 0519-32