war on the rocks

Sino-American Trade: We Know Where This Is Headed

April 18, 2018

 “If something cannot go on forever, it will stop.”
-Herbert Stein

It’s hard to be sure how Sino-American economic tensions will evolve this year. Will tariffs be implemented? Probably yes, but in reduced fashion. Will other barriers be raised? Yes, on investment. Who will come out ahead? Possibly China, but not for long.

It’s easier to be confident about the next decade. Sino-American economic cooperation jump-started when Deng Xiaoping resumed reform in 1992, climaxed with China’s entry into the World Trade Organization, and survived the 2008 global crisis. It is now starting to wind down. Both countries have changed such that yesterday and today’s relationship can’t go on forever. So, it will stop.

Twenty years ago, China was economically small compared to the United States. Its disposable income in 1998 was 1/50th (no, that’s not a typo) of America’s. Its GDP had just breached $1 trillion, which was barely 1/9th of America’s. U.S. consent to China’s WTO accession was driven by farmers and a relatively small number of multinationals. The economic stakes seemed low.

Ten years ago, China had risen but the United States had more pressing concerns — China’s economic role was still minor in comparison to self-inflicted American financial wounds. Some even hoped, mistakenly, that Beijing would help shoulder the burden of an open global economy.

In 2018, however, reasons for U.S. acceptance of continued Chinese trade predation are waning. Relocation of low-margin manufacturing in the 2000s hurt less skilled American workers yet benefitted consumers and utilized China’s comparative advantage of an extremely large and literate labor force. And there are certainly still American companies and notable interest groups who benefit from the status quo relationship with China.

But there has been an obvious shift from enthusiasm to caution in the American business community as a whole. Not coincidentally, the political community has simultaneously shifted from uncertainty to borderline hostility. Xi Jinping aims to remain in power indefinitely, achieving Maoist goals with 21st century techniques. The economic relationship has worsened for the United States in multiple ways.

Those who predicted pro-market reform when Xi became general secretary of the Communist Party should hide their heads in embarrassment. Beijing now seeks to displace foreign firms in high-end manufacturing and technology. It aims to do this not through comparative advantage, but via subsidies and scale achieved in sealed-off home market. Major American allies also see this as a crucial shift from China competing with developing economies to competing with developed economies.

It was thought China would respect intellectual property more as it climbed the technology ladder. Instead, it has refined tools to coerce technology transfer or steal it outright. Beijing denies seeking a trade surplus, but trade balance with the United States would have caused a $200+ billion drop in foreign exchange reserves last year, which it could not sustain. If the great Chinese consumer boom ever comes, it will have to be filled by goods and services made in China.

Quick, sharp changes in the relationship, as threatened by the Trump administration, would have costs for the United States. Ideally, Washington would articulate a clear strategy and implement it over time, allowing both American companies and trade partners to adjust. Given the administration’s pattern to date, a well-telegraphed adjustment seems unlikely.

But fast or slow, clear or chaotic, the United States will not accept another decade of a much-larger China warping competition in its home market while demanding open markets overseas. It will not tolerate another decade of China mining the relationship for resources to seize technological leadership. There can’t even be misplaced faith that the next leader will be different, given Xi’s chairmanship-for-life. The economic relationship will shrink. We’re just arguing about timing.

 

Derek Scissors is a resident scholar at the American Enterprise Institute (AEI) and concurrently chief economist of the China Beige Book. He is the author of the China Global Investment Tracker, a series of papers that chronicled the end of pro-market Chinese reform, and multiple papers on the best course for Indian economic development. Dr. Scissors has a bachelor’s degree from the University of Michigan, a master’s degree from the University of Chicago, and a doctorate from Stanford University.

Image: Flickr