First trade talks with China fail; Cold War the new reality

Failure of first round of US-China trade talks

May 8th, based principally on L.C.’s weekly trade reporting. The good news is that the two sides agreed to continue talking.  The bad news is that there was no indication from the May 3rd-4th meeting that any potential landing zones, compromises, or concessions were even discussed.

Before the high-level delegation arrived, the US didn’t send the usual prep team to stake out the major points for negotiation.  Instead, it sent a four-page memo titled “Balancing the Trade Relationship” that outlined US demands. Some of these were perfectly reasonable:

• Halt policies that lead to forced technology transfer,
• End theft, including cyber-theft, of intellectual property and trade secrets, and
• Ensure that US investors are given “fair, effective and nondiscriminatory market access and treatment” in China.

But others were not. They demanded that China must:

• Narrow the bilateral $375 billion goods trade deficit by $200 billion by 2020, largely by increasing imports from the US,
• Stop the high-tech subsidies of the Made in China 2025 industrial plan,”
• Unilaterally cut tariffs to US levels by 2020,
• Terminate WTO cases filed against the US, and
• Vow not to retaliate, especially against US farmers, for trade actions or investment restrictions taken by the US against China.

The unreasonable demands violate either the letter or spirit of the World Trade Organization (WTO) pact. Drastically cutting the bilateral trade imbalance couldn’t be done short of imposing managed trade such as export restraints and government directives to skew imports toward US suppliers, both of which are WTO-illegal.  It would also be futile from a macroeconomic standpoint, because the US trade imbalance would just shift to other countries because of the US current account deficit.

Unilateral cuts to China’s tariffs on US goods would also violate WTO rules, unless China were to cut the tariffs on a Most Favored Nation (MFN) basis, meaning they would be cut for all suppliers. But in that case US exporters wouldn’t have any advantage over other exporters to China, and for some products US exporters might be worse off.

The demand to stop high-tech subsidies appears to infringe on Chinese sovereignty. Most countries subsidize prioritized sectors, as the US Defense Department does for advanced technology.  In fact, Defense and other government subsidies for US aircraft development have already been found to be WTO-illegal in the Boeing-Airbus case, as have various countries’ subsidies for renewable energy. Although WTO rules need to be clarified in this area, the rule-of-thumb that would probably make the most sense would be to allow state-sector subsidies for investments of a primarily military nature and forbid them for those of a commercial nature. Any country violating this rule could be discriminated against for the commercial products that were subsidized.

China for its part has demanded that the US and WTO accord China market-economy status; open certain financial services, including its electronics payment market, to Chinese companies; and remove the penalties just imposed on ZTE. The US opposes giving China market-economy status and is backed up in this by its major allies. China has brought suit in the WTO over this issue; its resolution could potentially make or break the WTO. The US is also seeking to tighten restrictions on Chinese investment and expanding to Huawei its restrictions on Chinese telecommunications companies. It is also considering tightening restrictions on visas for Chinese nationals and limiting their participation at US universities and other research institutions. To the extent that these restrictions are security-related or concerned with halting Chinese theft of industrial secrets, China has no cause for complaint.

Cold War Two is on

The new reality is that China is a fascist dictatorship bent on world domination. Cold War policies need to be systematically applied toward it by the US and its allies. Free trade in non-defense goods and services should continue to be actively fostered, but militarily, diplomatically, economically, and intellectually the US must do all in its power to assure that the free world prevails.

The totalitarian intentions of Chinese dictator Xi Jinping will be clear to all with eyes to see. “President Xi Jinping is promoting Karl Marx as a rallying symbol for the nation,” the Wall Street Journal reports. “To mark the 200th anniversary of Marx’s birth this month, Mr. Xi launched a high-profile campaign celebrating the German philosopher. Communist Party newspapers hailed Das Kapital, Marx’s critique of capitalism, as ‘holy scripture.’…For Mr. Xi, the campaign is a way to demand loyalty within the ruling party…” Quartz notes that “Last week, Xi ordered his colleagues to study Marx’s 1848 Communist Manifesto…”

Xi’s Chinese Communists allow state-guided private enterprise to an extent that Marx did not envisage, but Xi’s celebration of Marx is in honor of Marx’s celebration of the totalitarian state, and it implicitly justifies the historical regimes he fostered: Lenin and Stalin’s Soviet Union, Cambodia’s Pol Pot, China’s Mao, and other like Communist regimes.

In response to Xi’s celebration of Karl Marx’s 200th birthday, several devastating Western exposes of Marx’s heritage were published and are must reading for anyone indulgent toward the Chinese regime’s intentions: by James Bovard, by Doug Bandow, and by Paul Kengor.

The German city of Trier, Marx’s birthplace; the head of Germany’s Catholic bishops’ conference, advisor to Pope Francis;  and European Commission head Jean-Claude Juncker must be either blissfully ignorant of Marx’s heritage or indifferent to Chinese dictator Xi’s celebration of it.

We can only hope that Cold War Two ends as peacefully as Cold War One with the Soviet Union did. But this is the greatest nightmare of the Chinese Communist leadership and why they are seeking total information control over their own subject population and the other nations they seek to dominate.

Has the US really thought through its trade strategy toward China?

There is speculation that Beijing can withstand trade pressure better than Washington.  The Chinese president is in a much stronger position than the US president in terms of having unchallenged executive power, a unified government behind him, and little concern about domestic opposition. In fact, the population supports a hard line toward the US, and there are no elections looming for Xi. Even though the Chinese economy would be likely to suffer at least as much from a trade war as the US, the betting is that the US will back off first.  As former Deputy Acting USTR Wendy Cutler told the Financial Times, the US demands are “more of a wish list than a serious negotiating proposal…. It will be interesting to watch how fast and far the administration moves off some of these proposals.”

The Chinese continued to argue this week that trade balances reflect savings and investment/consumption rates.  Calling the trade imbalance a “long-term” and “structural” problem, People’s Bank of China head Yi Gang told reporters on May 5th, “It is a macro issue…. the gap between savings and investment…. The US deficit is very likely to keep expanding” making it “quite difficult to solve the trade deficit problem.”

China  recently cancelled major orders for US soybeans, taking its business elsewhere — presumably Brazil, the largest soybean producer. US soybeans are a key target of China’s retaliation should the US go ahead and impose 25% tariffs on $50 (or possibly $150) billion on Chinese exports under Section 301. The cancellation came before any US tariffs have been imposed, presumably as a warning to Washington.

But on some measures the US seems on safer ground.

Taiwan

On May 5th the White House released a blunt statement directed at China for its attempt to force air carriers to reclassify Taiwan, Hong Kong, and Macao as parts of China, calling the move “Orwellian nonsense.”  Beijing’s directive demanded that the carriers follow Chinese law in referring to these places.  The sharpness of the US statement coming just after the return of the US delegation from Beijing suggests the Administration was sending a message that it is not preparing to back down in relations with China.  Escalating the confrontation to the level of the US government – and President – is expected to provoke a response from Beijing.

Visa restrictions

According to reports in the US press, the Administration is considering revising its policy on visas for Chinese nationals, aimed especially at restricting their access to US universities, research institutions, and companies, and especially access to research with advanced technology or military or intelligence implications.  It would require US entities to obtain licenses for any Chinese working in such areas.  Reportedly, a decision on the policy change is expected by June.  But even without the official change, there was a 24% fall in visas given Chinese students last year.

Rubio bill

Sen. Marco Rubio (R-FL) announced in a 5/2 Washington Post op-ed that he will introduce this coming week a bill – the Fair Trade with China Enforcement Act – “to guard the American people against China’s nefarious influence on national and economic security, directly targeting China’s tools of economic aggression.”

The bill would:  ban the sale of all sensitive technology or intellectual property to Chinese entities and impose a shareholding cap on Chinese investors in American corporations, including barring the federal government from purchasing or leasing telecommunications products from Huawei and ZTE;  and impose duties on Chinese capital goods in the sectors targeted by the “Made in China 2025” plan.

Unease in Washington

In Washington, while there is strong appetite in Congress to take a hard line on Chinese practices, there is also unease about where things are headed for in the Section 232 process (steel and aluminum tariffs affecting allies especially). There is also growing unease over the direction of the trade confrontation with China.  House Speaker Paul Ryan (R-WI) and Ways & Means Committee Chairman Kevin Brady (R-TX) expressed concern this week and urged, in Ryan’s words, that the President take a “surgical and targeted” approach, focusing on intellectual property theft, steel dumping and transshipment, but not resort to “tariffs… that are designed to prop up prices to artificially protect an industry.”

Senate Homeland Security & Government Affairs Chairman Ron Johnson (R-WI) and ranking Democrat Claire McCaskill (D-MO) sent a long, blunt, angry letter to Secretary Ross demanding that he supply information responding to their previous requests – which were not answered adequately – explaining how the department determined what the impact of its recommended steel and aluminum tariffs would be, how it judged the national security implication of the imports, and how it will determine the tariffs’ success once implemented.  The senators asked for a response by May 17th – warning that if it doesn’t get a satisfactory response, the committee will subpoena department records.

Or towards US allies?

The EU, Canada, and Mexico are facing an uncertain immediate future. They have insisted they won’t accept quotas or tariffs, and the EU has insisted it will retaliate if tariffs are imposed, having already set a retaliation list.  But EU member-states are divided, with Germany – a large steel exporter – more interested in finding a workable compromise than France and the European Commission.  The Germans are even continuing to promote the idea of forging a “light” free trade association (FTA) with the US to include zero tariffs on all goods. But that won’t be happening any time soon. Trade adviser Peter Navarro told a May 1st gathering of steel associations, “The guiding principle of this administration, from the president down… is that any country, or entity like the EU, that is exempt from the tariff will have a quota… and other restrictions.”  And:  “Thirty days, that’s it” – that is, there will be no more extensions:  countries that don’t agree to a voluntary quota will be hit with the tariffs. So a confrontation with the Europeans appears to be in the works.

WTO:  Public bodies

A key issue is the US characterization of companies with majority government control as “public bodies” so that their assistance can be treated as unfair government subsidies.  The issue of treating entities as public bodies also figures in the US WTO dispute with India over countervailing duties (CVDs) on hot-rolled steel in which the US treats India’s National Minerals Development Corp. as a public body; similarly, in disputes with Turkey over its steel exports by Erdemir.

Trans-Pacific Partnership (TPP)

Regarding the Trans-Pacific Partnership, US Trade Representative Robert Lighthizer reiterated to a Washington audience on May 1st that the US would consider reentering the pact only if it was able to negotiate “substantially better” terms.  Commerce Secretary Wilbur Ross explained that what the US objected to in the TPP was its auto rules-of-origin (ROOs).  These, he complained, were even looser than those in NAFTA, which the US is now insisting must be made a lot tighter. The TPP’s final ROOs were a hard-fought compromise, one of the more difficult parts of that negotiation to conclude, pitting Japan against Canada and Mexico, with other countries also involved.  It is not likely that Japan or the other participating countries would agree to changes demanded by the US.

Click here to go to the previous Founders Broadsheet post (“Is the US finally going to build a capable space-based missile shield?”)