China needs to obey the law

Many have rushed to judge President Trump's proclamation of a still incomplete China trade agreement, but overhyping the deal or winning only minor concessions are small blemishes. The Trump administration's true failure has nothing to do with the ostensible deal. The failure is continuing to let China break our laws or bending them ourselves for the sake of business. For years, policy toward China consisted of many meetings and fake progress. This administration took a vital step by recognizing there is a serious problem. But it still substitutes talking for enforcing Americanlaws and rules on reciprocity, intellectual property, export controls, and financial disclosure. While these laws are warped, there can be no trade win.

President's Trump weapon of choice has been tariffs. Buyers pay, but costs are a drop in the bucket compared to $14 trillion in annual American consumption spending. Moreover, tariffs are fitting in the sense that Beijing partly closes its own market by not allowing competition with state-owned enterprises. It's the president's goal that is flawed - Beijing agreeing to buy more American goods is just a bandaid. The United States should stop chasing handouts and instead insist on competing more freely, facing far fewer Chinese subsidies. The starting point is fully disclosing those subsidies. Beijing has never done this, despite long-standing commitments to the US and others. The United States Trade Representative originally applied tariffs in 2018 to foster improvement in intellectual property practices. IP coercion violates global obligations, and theft of course violates American law. But across-the-board tariffs are a poor punishment because they hit all China-based exporters, not just those implicated in coercion and theft.

A much superior policy would target Chinese entities which benefit most from IP violations. Punishing only the guilty creates the right incentives for guilty and innocent alike. American losses from IP coercion and theft could run in the hundreds of billions of dollars annually, involving dozens of criminal acts. There is an American initiative to turn this Chinese behavior into criminal cases. Yet the Trump administration's actions against Chinese firms on IP grounds can be counted on one hand.

For example, despite Huawei's history of IP theft, the United States only applied sanctions due to the company's dealings with Iran. The punishment - inclusion on the Entity List - bans unlicensed firms from supplying Huawei directly from the United States. Firms can just move production offshore and supply Huawei from there. The same applies to Chinese surveillance companies recently added to the Entity List. To enforce the law, the United States can block all business with IP thieves or slap them with heavy financial sanctions. Instead, the Trump administration is asking Beijing to change Chinese laws and regulations, even though the Communist Party can override all of these at will. The administration is effectively outsourcing protection of American IP to the Communist Party.

Overlapping with IP is the single most important element of policy: export controls. Illegal transfer of advanced American technology, with both economic and military uses, is most likely to occur in China. Export controls can address this, and transfers in third countries. In summer 2018, Congress in overwhelming numbers directed that controls be tightened. The Department of Commerce's Bureau of Industry and Security is late implementing the new statute's regulations. It doesn't help that no one is in charge at BIS, nor is there much prospect of anyone being in charge. Some American industries have taken this as an opportunity to lobby for profits over national security. The likely result is weak export controls and continued technology transfer to China despite the intent of Congress. As with IP protection, the Trump administration demands Beijing halt illegal technology transfer, while its own commitment to do so is at best uncertain.

A final subversion of American law is found in financial disclosure requirements for stock market participation. In December 2018, American regulators identified some 200 Chinese companies as failing to provide information required to be listed on our exchanges. This is ultimately a function of sweeping protection of what the Party considers "state secrets," and dates back years. The response from the American financial community, here and elsewhere, is typically that rules are too expensive to enforce when it comes to China. This is a fundamental weakness within policymaking in the United States. No promises from Beijing next month or next year stack up to the ongoing undercutting of our laws.

-Derek Scissors is a resident scholar at the American Enterprise Institute, chief economist of the China Beige Book, and creator of the China Global Investment Tracker.