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A better approach to China trade

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Smart people have worked hard on a China trade agreement, but the deal can’t turn out well for the US. Beijing is the primary cause but another is the Trump administration’s approach so far — pushing the Communist Party to do for us what we haven’t done for ourselves. The better alternative is to put the talks on hold and fix America’s China policies.

U.S Trade Representative Robert Lighthizer, second from left, speaks with Chinese President Xi Jinping, next to U.S. Treasury Secretary Steven Mnuchin, left, during a meeting at the Great Hall of the People in Beijing, China February 15, 2019. Andy Wong/REUTERS

Recent discussion of the deal focuses on enforcement. Yet enforcing acceptable Chinese behavior on intellectual property requires far stronger action than the US has ever taken.

China is highly indebted. It will rapidly age over the next generation. Its natural resources are depleted. Its economy thus increasingly relies on innovation, as the Communist Party recognizes.

The catch is the Party requires state-owned (near-)monopolies, in banking, oil, telecom, and many other sectors. Sheltered from competition, state enterprises have little reason to innovate. To spur growth in these areas, China leaves itself no choice but acquire foreign technology, by hook or crook.

America can’t change this with enforcement offices or constant meetings. It requires retaliation against offenders severe enough to put them out of business, in order to deter others. In 27 months, the Trump administration has taken major (public) IP action against exactly one Chinese firm. We’ve failed to act on our own, and no deal with Beijing can make that more likely.

President Trump’s response might be that he applied tariffs. Tariffs hit all makers of selected products, not just bad actors. “Snapback” tariffs if China keeps stealing IP would also punish everyone. The thieves at least might get what they’re chasing; firms which obey US laws just get the tariff. Tariffs are the wrong tool on IP.

Tariffs do serve another purpose: pushing Beijing to buy American goods. If a deal is completed, the US will sell more to the PRC, for a bit. While the administration would hype these sales, they can’t last.

China runs a huge goods trade surplus with the US, $419 billion last year. Its pile of foreign exchange reserves — the money used to pay for imports — still fell $70 billion. For the sake of buying American products, Beijing can afford a couple years of large reserves drops, no more.

The PRC’s other option is to divert purchases from other countries. The Communist Party sees the US as its principal external threat. Will it risk relations with countries it has long tried to turn away from us, in the hope of retaining American goodwill?

AEI’s Dan Blumenthal writes extensively on rising US-China military and strategic rivalry. Like it or not, this rivalry frames all economic contact with the PRC. To illustrate, there has been talk of a $200-billion jump in semiconductor exports to China. Beijing would run down reserves for that. But it would end badly for the US, with American firms more dependent on China and vulnerable to coercion.

The Trump administration needs to switch tactics. The basic principle is seen in currency. Secretary Mnuchin touts the currency chapter in the trade deal as “one of the strongest.” He has refused four chances to designate the PRC a currency manipulator (and just ignored the latest deadline).

This domestic US means of addressing currency abuses hasn’t been employed in decades. If it’s a poor tool, change it. If we can’t create or don’t have the will to use the right tools, how can it help to negotiate them with a strategic competitor run by a totalitarian dictatorship?

Rather than hoping the dictatorship will solve problems for us, the US should take care of itself. We have never even attempted to properly enforce laws on IP theft. As mandated by Congress, the Trump administration is crafting new regulations on export controls to address technology transfer. The process gets little attention, yet the outcome is far more important than Chinese pledges they will again break.

On purchases, American gains will be limited by the PRC’s protection of state enterprises and reliance on the surplus with the US to support foreign reserves. The administration can’t possibly be held responsible for that, but it shouldn’t pretend a trade deal will fix Beijing’s harmful policies. The best course is to step away from the table, Mr. President, and fix our own poor polices.

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