US, China are finally having it out
With the arrival in Beijing this week of the United States’ top trade negotiators, you might think the U.S. and China are about to enter high-level talks to avoid a trade war and that this is a story for the business pages. Think again. This is one for the history books.
Five days of meetings in Beijing with Chinese, U.S. and European government officials and business leaders made it crystal clear to me that this is nothing less than a struggle to redefine the rules governing the economic and power relations of the world’s oldest and newest superpowers — the United States and China. This is not a trade tiff.
“This is a defining moment for U.s.-china relations,” said Ruan Zongze, executive vice president of the Chinese Foreign Ministry’s research institute. “This is about a lot more than trade and tariffs. This is about the future.”
As one Chinese expert put it at a Tsinghua University dialogue on trade: “No one can contain China anymore.” You hear that confidence in Beijing a lot today: Our one-party system and unified society can take the pain of a trade war far longer than you Americans can. And there is a trade imbalance because we’ve been investing in our future and you Americans have been eating yours.
Here’s how we got here: In Act 1, U.s.-china relations were all geopolitics, with the U.S. and China against the Soviet Union. That lasted until the late 1970s, when Act 2 began: China shifted toward capitalism, becoming a huge factory and new market — and 30 years later turned into the world’s second-largesteconomy.
In large part this was due to the work ethic of the Chinese people, the long-term thinking of China’s leaders and the government’s massive investments in infrastructure and education. But in part it was also due to China’s willingness and ability to bend or ignore rules of the World Trade Organization and, at times, outright cheat.
In some cases, China used industrial espionage to just steal innovations from the West. Other moves were more subtle: When China joined the WTO in 2001, it was allowed in as a “developing nation,” subject to very low tariffs on its exports to our country but permitted to impose high tariffs to protect its own rising industries from U.S. and European competition.
The assumption was that as China grew, it would cut its tariffs — like its 25 percent tax on car imports, compared with the 2.5 percent imposed by the U.S. But the WTO still has not completed a new trade round and China has refused to voluntarily lower its tariffs.
Moreover, China developed an industrial policy that often bent WTO rules. The government gave away cheap land, and state-guided banks granted cheap loans for new industries, but foreign companies that wanted access to China’s market were forced to pay to play — to have a Chinese partner and be willing to transfer their advanced technologytothem.
As a result, over time, Beijing was able to force multinationals to shift more and more of their supply chains to China, and grow Chinese competitors to Western companies in its protected market, and then, once they were big enough, unleash them on the world as giants.
U.S. and European businesses tolerated all of this because they were making money in China or were afraid to be frozen out of its market — until a couple years ago, when more and more told their governments: This is not working anymore. That ushered in Act 3.
Act 3 opened in October 2015, when China announced its new long-term vision: Made in China 2025, a plan to dominate 10 next-generation industries, including robotics, self-driving cars, electric vehicles, artificial intelligence, biotech and aerospace.
When the U.S. and Europe saw this, they basically said: “Wow. We were ready to turn the other cheek when your hard work, cheating and industrial policy was focused on low-end industries. But if you use the same strategies to dominate these high-end industries, we’re toast. We need some new rules.”
And I heard this as much from EU officials as U.S. ones. That is why many EU countries are scrambling to pass laws to prevent China from buying up their most advanced industries. And that is why China is telling EU countries, as one EU official put it, “Whatever you do, don’t join the U.S. camp” on trade. The last thing Beijing wants is a U.S.-EU united front demanding it play fair.
Don’t get me wrong. I am a free trader and genuinely not afraid of some state-directed 2025 plan beating Western free-market innovators. I welcome China focusing more on 21st-century industries. It could be better for everyone.
Economics is not like war — both sides can win. On one condition — we all play by the same rules: hard work and innovation, not hard work and stealing intellectual property, massive government interventions, ignoring WTO rules, lack of reciprocity and forcing Western companies to pay to play inside China.
That is what this moment is about — that’s why it’s a fight worth having. Don’t let the fact that Trump is leading the charge distract from the vital importance of the U.S., Europe and China all agreeing on the same rules for 2025 — before it really is too late.