The
announcement by the Trump administration that the United States will sanction
China for intellectual-property theft is the latest salvo in a deepening trade
dispute between the two countries. It follows Trump’s March 8 pledge to place
higher tariffs on Chinese steel and aluminum – a move some predict could have
dire consequences for the global trading system.
But while
these penalties are generating frightening headlines – and rattling investors –
it is the recent tax bill passed by the US Congress that will do more to
exacerbate trade tensions between the US and China. Unless the implications of
that move are fully appreciated, bilateral trade ties could worsen much more
before they improve.
The new tax
legislation will widen the US government deficit by $1-2 trillion over the next
decade, a shortfall in national saving that will not be offset by an increase
in private-sector saving or reductions in private-sector investment.
What this
means for trade, and particularly trade between the US and China, is key.
Because the US current-account deficit is the sum of investment minus private
sector and government saving, the US current-account deficit is likely to
increase – again, by as much as $2 trillion over the next decade. The US trade
deficit will surge accordingly, and the annual bilateral deficit with China
could grow by $50-100 billion.
When this
happens, US politicians will need to cast blame, and China will be the likely
scapegoat. In that case, the new US tax law – hailed by Trump as a victory for
the American people – will come home to roost in the form of even more serious
trade tensions. While the connection between the tax law and an increase in the
US trade deficit is not well understood, its impact will be felt for years to
come.
To be sure,
Trump’s demand for stronger intellectual-property rights in China is justified,
given many cases of patent and trademark infringement. In several sectors,
including energy and telecommunications, China requires foreign firms to share
proprietary technology with their Chinese partners as a condition of market
access. Yet Chinese officials could be persuaded to strengthen
intellectual-property protections, possibly through bilateral negotiations or
World Trade Organization litigation.
The
changing innovation landscape in China is one reason for optimism on this
front. Simply put, Chinese firms would also benefit from a stronger
intellectual-property-rights regime. In the past, foreign firms provided the
innovation, and Chinese firms imitated foreign design. Protecting intellectual
property was largely a one-way street; only the foreign firms benefited.
That is no
longer true. Many Chinese firms innovate and have obtained patents not only in
China, but also in the US. Chinese firms like Tencent, DJI, and Huawei are as
innovative as any US company, and Chinese CEOs are pushing for stronger
intellectual-property protection at home. With the need to compel multinational
firms to transfer technology waning, and Chinese firms standing to benefit from
intellectual-property protection, the US and China can more easily find common
ground.
This is not
to say that negotiations would be easy. For starters, the Chinese view their
policies on technology as a necessary response to rising labor costs at home,
and as a hedge against US restrictions on high-tech exports to China. With a
rising wage level, China’s labor costs now exceed those of India, Bangladesh,
and Vietnam. As a result, a shift to more technically sophisticated production
has become essential. If Chinese companies cannot buy high-tech products from
the US, they are even more motivated to develop their own.
A second
challenge to negotiations, if they occur, is dwindling support from corporate
America. In the past, companies like Boeing, Caterpillar, General Electric, and
Cisco were voices of moderation; they saw themselves as beneficiaries of
China’s large markets and low-cost labor. But the business landscape has
changed dramatically, and today these same companies are more likely to view
Chinese firms as competitors – not only in China, but around the world as well.
If not
properly managed, these forces will fuel a vicious cycle. The more restrictions
the US places on technology exports to China, the more China will promote
domestic technology. Conversely, the more Chinese firms innovate, the less
enthusiastic US firms will be about helping their counterparts enter the US
market.
Still, some
form of grand bargain on intellectual-property rights is possible if the trade
puzzle is properly mapped out. Strengthening intellectual-property rights in
China is not a zero-sum game; better protections can benefit both countries.
But the
biggest puzzle piece of all is one few are talking about. If the US and China
can’t find common ground on how to address the ballooning US trade deficit,
progress on the big issues of today may become irrelevant tomorrow.
China’s
trade surplus and the US trade deficit ultimately reflect saving and investment
imbalances. The non-market “trade remedies” being considered by the US and
China might produce a smaller trade imbalance between the two economies, but at
the cost of a larger imbalance with the rest of the world. This could leave
consumers and companies in both countries, and around the world, worse off.
https://www.neweurope.eu/article/avoid-us-china-trade-war/