Are China’s trade prac­tices re­ally un­fair?

Gulf Times - - COMMENT - By Daniel Gros

The tem­po­rary truce reached by US Pres­i­dent Don­ald Trump and his Chi­nese coun­ter­part Xi Jin­ping at the just-con­cluded G20 meet­ing in Buenos Aires should give both sides some time to re­flect on the is­sues in ques­tion. And the most fun­da­men­tal of those is­sues is whether Amer­i­can griev­ances against China – shared by many of the ad­vanced economies – are jus­ti­fied.

To be sure, uni­lat­eral US mea­sures are in­de­fen­si­ble un­der global trad­ing rules. But some push­back con­ceiv­ably could be war­ranted if the ad­vanced economies – which have al­ready cre­ated an in­for­mal con­tact group of “China losers,” in­clud­ing rep­re­sen­ta­tives of the Euro­pean Union, Ja­pan, and the United States – are right that China has been en­gag­ing in un­fair trad­ing prac­tices.

For the US, the big­gest con­cern seems to be so-called forced tech­nol­ogy trans­fer – that is, the re­quire­ment that for­eign com­pa­nies share their in­tel­lec­tual prop­erty with a do­mes­tic “part­ner” in order to gain ac­cess to the Chi­nese mar­ket. But this is a mis­nomer, at best, be­cause com­pa­nies that do not want to share their tech­nol­ogy can al­ways choose not to in­vest in China.

Europe’s com­plaints – or, more specif­i­cally, the com­plaints of over 1,600 Euro­pean com­pa­nies – are sum­marised in a new re­port is­sued by the Euro­pean Union Cham­ber of Com­merce in China. But, in­ter­est­ingly, few of those com­plaints are about China’s trad­ing prac­tices per se, at least in the nar­row sense.

Tar­iffs, for ex­am­ple, are not cited. With its ac­ces­sion to the World Trade Or­gan­i­sa­tion in 2001, China was forced to re­duce its tar­iff pro­tec­tions by one-half. In the en­su­ing years, the av­er­age tar­iff rate ap­plied by China has con­tin­ued to fall, and now stands at less than 4%, though China does main­tain an un­usu­ally high num­ber of tar­iff peaks (that is, high tar­iffs for very lim­ited cat­e­gories of prod­uct).

Of course, tar­iffs are far from the only way to cre­ate ob­sta­cles to trade. In­deed, in many ways, tar­iffs are yes­ter­day’s prob­lem – at least they were, un­til Trump dusted them off as a weapon for his trade war. But when it comes to non-tar­iff bar­ri­ers, China’s record also does not seem as prob­lem­atic as is claimed.

To be sure, it is dif­fi­cult to mea­sure the over­all im­por­tance of non-tar­iff bar­ri­ers to trade, be­cause they can take so many forms. But, ac­cord­ing to the in­de­pen­dent Global Trade Alert ob­ser­va­tory, since 2008, China has in­tro­duced only 25 mea­sures (re­ferred to as “state in­ter­ven­tions”) per year, on av­er­age, that might re­strict trade with the US.

Mean­while, China en­acted about the same num­ber of new mea­sures that lib­er­al­ize trade with the US. Over­all, then, China has not be­come more pro­tec­tion­ist against the US; on the con­trary, the open­ing process is con­tin­u­ing, al­beit very slowly. By con­trast, the US has en­acted be­tween 80 and 100 re­stric­tive mea­sures against China ev­ery year, and far fewer lib­er­al­is­ing mea­sures.

Other in­di­ca­tors con­firm China’s grad­ual move to­ward lib­er­al­i­sa­tion. This is the case even for for­eign in­vest­ment – an is­sue about which both US and Euro­pean com­pa­nies com­plain. Although China re­mains far less open to for­eign di­rect in­vest­ment than most ad­vanced economies, the OECD’s com­pos­ite in­di­ca­tor shows that there has been con­tin­u­ous, al­beit slug­gish, im­prove­ment.

In short, even if China’s non-tar­iff bar­ri­ers (both for­mal and in­for­mal) re­main high, they are lower than in the past. So, why are the US, Europe, and Ja­pan push­ing back now?

The an­swer lies in the in­creased com­pet­i­tive­ness of Chi­nese pro­duc­ers. When West­ern com­pa­nies had a near-monopoly on know-how and tech­nol­ogy, their com­pet­i­tive edge more than com­pen­sated for dis­tor­tions cre­ated by Chi­nese bar­ri­ers to trade and in­vest­ment. But, as Chi­nese en­ter­prises have be­come in­creas­ingly se­ri­ous com­peti­tors in their own right, West­ern coun­tries’ ca­pac­ity to bear the ex­tra costs of non-tar­iff bar­ri­ers has di­min­ished.

Com­plaints about un­fair Chi­nese trade prac­tices, there­fore, are ac­tu­ally com­plaints about the mis­match be­tween the slow pace of eco­nomic open­ing and the very fast pace of mod­ern­iza­tion. The com­pet­i­tive­ness gap be­tween China and the OECD coun­tries is clos­ing much faster than the reg­u­la­tory en­vi­ron­ment is con­verg­ing.

In fact, per capita GDP – and thus pro­duc­tiv­ity – in a num­ber of Chi­nese prov­inces with a com­bined pop­u­la­tion of over 100mn is sim­i­lar to that of ad­vanced coun­tries (around $30,000 per capita at pur­chas­ing power par­ity). Of course, the na­tional av­er­age is much lower (about one-half), as over­all pro­duc­tiv­ity is much lower, and the Chi­nese au­thor­i­ties have to cal­i­brate poli­cies for their en­tire vast coun­try. But, for the out­side world, the high­pro­duc­tiv­ity re­gions are what mat­ters.

If we are to avoid fur­ther es­ca­la­tion of ten­sions, the West and China must ac­knowl­edge each other’s per­spec­tives. Ul­ti­mately, how­ever, for­eign pres­sure will have lit­tle ef­fect on China’s mas­sive and pow­er­ful econ­omy. The real ques­tion for China lies at home: Do en­dur­ing dis­tor­tions and bar­ri­ers to in­vest­ment re­ally serve the devel­op­ment of the coun­try’s lag­ging prov­inces?

In the past, it might have made sense to pro­tect the nascent in­dus­tries in the coastal re­gions from for­eign com­pe­ti­tion. To­day, how­ever, China’s pro­tec­tion­ist regime does lit­tle to help nascent in­dus­tries in the poor in­te­rior, be­cause their big­gest com­peti­tors are no longer for­eign com­pa­nies, but rather firms from the dy­namic coastal ar­eas. This im­plies that China must re­think its very devel­op­ment strat­egy. And to do that, the last thing pol­i­cy­mak­ers need is an on­go­ing trade war. – Project Syn­di­cate

O Daniel Gros is Di­rec­tor of the Cen­ter for Euro­pean Pol­icy Stud­ies.

US Pres­i­dent Don­ald Trump, US Sec­re­tary of State Mike Pom­peo, US Pres­i­dent Don­ald Trump’s na­tional se­cu­rity ad­viser John Bolton and Chi­nese Pres­i­dent Xi Jin­ping at a work­ing din­ner af­ter the G20 lead­ers sum­mit in Buenos Aires on De­cem­ber 1, 2018. FILE PHOTO:

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