Trump must prepare for a showdown with Beijing

Donald Trump faces immediate challenges on multiple fronts — managing the war against Islamic State, fixing Obamacare and boosting growth to create jobs.

However, as the fallout from his recent conversation with the president of Taiwan indicates, an increasingly assertive China poses the most vexing and far-reaching challenges for American prosperity and security.

China has accomplished hyper-growth supplying Western consumers with inexpensive goods and attracting Western investment to transfer technology. Accomplishing this, it has hardly played by the established rules and norms of global trade.

It isn’t just Trump and/or the Republicans who have a clear sense that the way in which China has conducted itself in the international economy is a problem.

The Democrats’ 2016 presidential candidate, Hillary Clinton, criticized China for subsidizing exports, manipulating its currency and other abusive practices. And she promised to better enforce U.S. rights under international agreements.

America’s $320 billion annual deficit on trade in goods and services with China depresses demand for U.S.-made products.

It also curtails funding for U.S.-based R&D, kills millions of jobs and is a principal cause of the blight in communities like Reading, Pennsylvania, and Hickory, North Carolina.

Just as menacing, the trillions in cumulative trade surpluses China has amassed are financing a dramatic pivot in its industrial, military and foreign policies. This threatens security in the Pacific as well as America’s standing with allies around the globe.

As wages rise in Chinese coastal manufacturing centers, jobs move further west in China and elsewhere in Southeast Asia. This causes major social disruptions in China itself.

For example, Dongguan, near Hong Kong, has endured job losses on a scale similar to large U.S. Midwestern cities.

To buffer job losses and limit political unrest, Beijing is pursuing a multi-pronged strategy.

1. It is imposing tougher restrictions on foreign investment. This step further depresses the value of the yuan.

2. China’s government is also ladling on more subsidies for basic manufacturing, tightening administration restrictions on imports and consolidating state owned enterprises to enhance their monopoly power.

3. Simultaneously, Beijing is encouraging more technology-intensive activities that strike at the heart of American and European competitiveness. This strategy is executed via lavish subsidies for startups, acquisitions of U.S. and European businesses, and toughened regulation of American and other foreign technology companies operating in China.

In the process, the Chinese government sees to it that many products and components that are used by its basic assembly and fabrication operations and were once sourced in the U.S. and Western Europe, are now made in China.

The message from all this is very clear: China knows only one set of interests — its own. It basically disregards the interests of all other nations.

That is the principal reason why it is so adamant to move up its production capabilities on the value-added chain.

Given that, it almost doesn’t matter that most of those tactics either violate World Trade Organization rules or are decidedly asymmetrical.

The U.S., Germany and other European nations generally permit Chinese to purchase companies outright. In contrast, Western investors generally must offer Chinese joint-venture partners a substantial stake when establishing subsidiaries in the Middle Kingdom.

The only thing that is astounding under those circumstances is that the China apologists in Western businesses still hope that all that is required for proper balance in the world economy is a slight attitude change of the Chinese.

That won’t happen for one very simple reason — China’s leadership, if it wants to preserve its rule, cannot afford to consider trade a two-way street. And self-preservation is the only dogma the Communist Party really follows these days.

The cash China earned from its huge trade surpluses is financing a massive buildup in naval and air power. This is what drives the militarization of the South China Sea and about 20 port facilities that Chinese warships can access in Asia, Africa, the Middle East and Europe.

President Barack Obama has been hesitant to take the advice of U.S. defense leaders in challenging China’s artificial islands and militarization of the vital South China Sea. However, the combination of U.S. hesitation paired with the display of Chinese muscle (and billions in new investment) has encouraged longtime U.S. allies the Philippines and Malaysia to tilt toward Beijing.

The new U.S. president must prepare for a diplomatic and perhaps military showdown in the Pacific.

As a nation, we cannot afford not to confront Beijing on the massive trade imbalance that finances Chinese mercantilism and adventurism.

It’s not just America’s but the world’s prosperity and security that depend on it.

Peter Morici is a professor of international business at the University of Maryland, College Park. © The Globalist 2016

Leave a Reply