China Should Do What Trump Says on Trade

(Bloomberg) -- If you’re surprised that last week’s trade negotiations between the U.S. and China achieved little, take a look at the laundry list of demands the White House foisted on Beijing.

President Donald Trump wants China to slash the trade deficit; end cyber theft of U.S. technology; eliminate regulations impeding access for American companies; cease subsidizing new high-tech industries; and more. Chinese officials probably were taken aback by the sheer breadth of requests.

One could argue that Trump asked for too much, or that his agenda is unfocused. A less confrontational approach might work better, with Beijing touchy about foreign pressure. And a couple of items do seem unreasonable, particularly the misguided edict for a $200 billion reduction in the U.S. trade deficit.

Still, China should do what Trump says. Not to appease Washington, but for its own good. Most of the changes the U.S. is seeking would help Beijing’s leaders achieve their economic goals.

Many of the demands clear away principles that are out of touch, both with international practice and the needs of today’s China. By implementing them, the nation could boost productivity, increase innovation and better allocate resources.

Take Trump’s insistence on stronger protection of intellectual property.

The joint-venture and other rules forcing multinationals to disgorge technology to gain market access in China can make CEOs wary of importing their best know-how. Stronger IP protection would encourage international — and Chinese — businesses to invest in R&D.

Dropping tariffs and other barriers has benefits, too. More open access for products and services would increase competition and consumer choice, giving momentum to Beijing’s push toward a consumption-driven growth model. Ending or reducing financial support to companies in favored sectors, like those in the “Made in China 2025” industrial program, would help avoid the kind of excess created by earlier efforts in, for example, steel. There’s ample evidence that picking winners and plying them with cheap credit seldom produces competitive companies. The Japanese tried it and achieved little: Most of that nation’s success stories were never targeted for bureaucratic support.

Treating foreign firms equally will ensure something else that’s crucial for China — full access for its own companies to the U.S. and other markets.

The imbalance in the relationship can be seen in the very different demands brought to the negotiating table. Beijing trotted out more narrowly defined requests, some of them related to recent actions by the Trump administration. That’s because Chinese firms have enjoyed relatively free access to the U.S. market, both as investors and exporters (with a few exceptions, like Huawei Technologies Co.). That situation won’t last. If Beijing doesn’t open its doors, Chinese companies will find life increasingly hard, undercutting their ability to become global. Trump is also threatening to sever access to U.S. technology — a potentially serious blow.

To be fair, China is undertaking some of these reforms, such as a phased elimination of joint-venture requirements in car manufacturing. My guess is it will try to avoid many of the rest, especially on a time scale acceptable to Washington. Beijing perceives its industrial policies as essential, and won’t significantly scale them back. The state press has been railing that the government doesn’t force foreign firms to transfer technology, a sure sign of the official stance.

Fundamentally, China’s leaders don’t see pro-market practices or fair trade treatment as necessary. The nation is on a quest to promote corporate champions and technological development through state-led industrial policies. Don’t expect that to change soon: The current administration isn’t willing to trust markets to develop the nation. Indeed, the Communist Party is entrenching itself more deeply in the corporate ethos.

So the talks in Beijing weren’t just about trade and market access. The conflict is morphing into something bigger — call it a clash of economic civilizations. The U.S., very generally, believes openness wins, accepted norms and rules are critical in economic relations, and private enterprise is better at creating jobs and technological breakthroughs than government. China believes in controlling markets to achieve goals, in the indispensable role of the state, and in altering rules as the need arises.

With such a chasm between the sides, last week’s negotiations were doomed. Future rounds may face a similar fate.

©2018 Bloomberg L.P.

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