Give China a Taste of Its Own Bad Trade Medicine
An employee at a currency exchange store counts U.S. one-hundred dollar banknotes next to a pile of Chinese one-hundred yuan bills in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

Give China a Taste of Its Own Bad Trade Medicine

(Bloomberg Opinion) -- One of my mottos is: Don’t criticize something unless you have a better idea. I’ve decried President Donald Trump’s tariff tactics, so it’s only fair I offer my own strategy for fighting a trade war with China — one with a bigger chance of success and smaller downside risk.

Trump is right about China but wrong in his method. Yes, Beijing engages in unfair business and trade practices. Yes, something has to be done. But tariffs, bluster and threats aren’t likely to inflict enough damage to compel China to change.

A better plan would be to adopt the same restrictions on Chinese companies in the U.S. that Beijing imposes on foreign firms there. In other words: Give the country a taste of its own bad medicine.

It would work like this: In industries where China forces overseas companies to form joint ventures with local partners — as in automobile manufacturing or stockbroking — Washington would do the same. That means a Chinese company such as Geely Automobile Holdings Ltd., which this month opened a Volvo factory in Charleston, South Carolina, would have to hook up with General Motors Co., Ford Motor Co. or another American firm.

In industries where Beijing bans foreign investment, such as movie production companies or internet media, the U.S. would prohibit Chinese investors.

Beijing runs overseas firms through a gauntlet of requirements that’s much more intrusive than the international norm. For instance, when seeking licenses they must disclose unusually detailed information about their manufacturing processes and products, rendering them vulnerable to intellectual property theft. Such strictures should be slapped on Chinese companies in the U.S., too.

It’s highly unlikely that a U.S. company would be allowed to acquire a major Chinese firm in the technology sector or another industry considered sensitive or important, even if there are no official barriers. Washington can use the Committee on Foreign Investment in the United States, which scrutinizes acquisitions on national security grounds, to block purchases that wouldn’t pass muster if the positions were reversed.

The Chinese government would be politely informed that Washington would be more than happy to remove these regulations — once Beijing lifted its own restrictions.

There are elements of this approach in Trump’s program. His administration is considering limits on Chinese investment in the U.S. technology sector. But my plan has clear advantages.

First, it won’t inflict as much damage on the U.S. economy. Trump’s tariffs will raise prices for consumers and dent growth and jobs.

Second, it holds the high ground. Since Washington would be doing no more than matching Beijing’s restrictions, my way would undercut any attempt to paint the U.S. as the bad guy.

Third, I’d hit China where it hurts most. Companies that want to go global need the U.S. market and technology. Denying them would deal a heavy blow to the country’s economic agenda. With their wings clipped, Chinese CEOs might lobby their government to reform more quickly. 

Fourth, my plan keeps its eye on the prize: ending China’s abuses of U.S. firms. Trump’s leverage has been weakened by his competing priorities and overwhelming desire to narrow the trade deficit quickly. Much more important is opening the Chinese market and ensuring fair treatment of overseas companies. That would reduce the trade imbalance over time.

Of course, no approach is a sure bet. Beijing could ignore the reciprocal nature of my program and retaliate anyway. Chinese companies that would have invested in the U.S. could take their capital elsewhere (indeed, this is already happening).

That’s why any attempt to get tough would work best as a coordinated effort by the U.S. and its allies in Europe and Asia. Isolating Beijing would greatly intensify pressure for concessions.

So, too, would toning down the rhetoric. Trump’s tweet-all-about-it tactics build resistance to compromise among China’s thin-skinned authorities. A stealthier strategy may not score as many domestic political points, but would probably notch more wins.

Tariffs may at one point become necessary, on a very limited basis, to counteract the massive financial aid China lavishes on companies in some sectors. But for the moment, there are better tools available. Trump should use them.

©2018 Bloomberg L.P.

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