While the US should not attempt to remake China in its own likeness, Beijing should take on board criticism of some of its trade practices and implement reforms that would ultimately benefit its economy.
The US-China trade war is not fundamentally about a trade?
Yes, US President Donald Trump and some of his advisers’ warped understanding of international trade precipitated their use of tariffs as a blunt instrument to “fix” trade imbalances.
However, the feud must be seen in the context of much broader bilateral conflicts based on deep-rooted differences between the two countries.
At the core of the impasse is the fact the reigning hegemon feels threatened by a very different rising power.
China is perceived as taking coordinated steps to transform itself into a global power, according to a recent US Congressional report. Moreover, China is almost the antithesis of the US except for its embrace of capitalism.
Some of China’s recent actions have confirmed the US worst fears. Now without a term limit, Chinese President Xi Jinping could rule for life, some in the US believe.
Protection of human rights has deteriorated with the persecution of Christians, Uygurs and human rights lawyers.
While these are domestic issues China considers none of the US business, the US sees them as evidence of China being an unconstrained authoritarian power with divergent values.
China is viewed as militarising the South China Sea, challenging US supremacy in the Pacific. Xi’s Belt and Road Initiative is interpreted as a sinister plan to redraw the US-dominated world order.
While the former affront is regional, the latter is nothing less than the declaration of a global challenge. China is perceived to be trying to reframe, revise and subvert the world order maintained by the US one created to support its interests.
But the US cannot remake China in its own image. In the past, the US and its allies have all used industrial policy, and the US today still subtly does so.
While “Made in China 2025” may be seen as threatening American technological dominance, the US cannot impose on China a form of liberal capitalism that it preaches but does not practice.
In fact, China is merely following a model akin to that of Japan and Germany. What can be discussed, however, are US grievances over China’s trade practices, some of which are not without merit.
First, technology transfer. China once used technology transfers to catch up with developed economies, given how far behind it was and how few resources it had.
In addition to market access, there were generous incentives attached to such transfers, from cheap land to tax concessions. Such deals must have been attractive to foreign companies, as none were forced to come to China.
Today, however, along with a massive indigenous technology push, China has persisted with technology transfers. With by far the largest number of annual patent applications in recent years, China may now be too developed for this strategy.
Instead, it should increase joint technology development with European countries, Korea and Japan. Technology transfers by foreign companies should become voluntary and optional.
In any case, technology transfers by returnees who start new firms have become more important.
Second, market access. Despite US rhetoric, cursory observations on the streets of Shanghai and Tokyo make it obvious which country has the more open car market. For example, the US has a longstanding tariff on pickup trucks.
Meanwhile, Tesla recently set up a wholly owned manufacturing operation in China.
In contrast, Chinese telecom equipment companies are barred from many Western markets on national security grounds. The US has imposed foreign ownership restrictions on some hi-tech sectors.
As long as it is reciprocal, China could consider granting more market access to foreign companies. For example, it may be more open to American services the US enjoyed a US$40 billion services trade surplus with China in 2017 such as in financial services and higher education.
With greater foreign competition, Chinese banks would become more efficient, depositors would get higher interest rates, private enterprises would have better access to financing and consumers could choose from a wider range of insurance products.
If more US universities were permitted to set up campuses in China, even without a mandatory Chinese partner, Chinese students could “go abroad” at home.
Third, intellectual property protection. As a start, cyber-espionage and industrial espionage should cease on all sides. Whatever the extent of IP thefts or whoever was behind them, the Chinese government is more than capable of stopping them.
Furthermore, Chinese companies should be prosecuted for IP infringements, no matter how strategic or well connected they are. China’s IP courts are a start and Hong Kong’s legal system could also play a role here.
To gain the respect of the world, China must be even-handed with the rule of law – consistent with its historical moral tradition.
As long as it plays fair, however different China is, there is no justification for the US to contain it. For its part, China must go out of its way to show that it is a gentleman on the world stage.
The end sometimes justifies the means at all levels in China, a nation in hurry. By providing a level playing field for all – foreign and private enterprises China will develop a more competitive economy and achieve a more sustainable future.
China need not see the trade negotiations as a zero-sum game.
Along the way, Beijing may be pleasantly surprised by how more even-handed international competition at home will result in higher efficiency, greater innovation and stronger growth.