published May 3, 2018, 4:00:15 PM, by David Fickling and Christopher Balding
(Bloomberg Opinion) —

Amid a simmering trade dispute, top officials from President Donald Trump’s administration are visiting Beijing this week, hoping to induce China to make key concessions on matters such as market access and the U.S. trade deficit. Bloomberg Opinion columnists Christopher Balding and David Fickling recently debated the topic.

David Fickling: Let’s assume for a moment that the current tensions between the U.S. and China degenerate into something resembling a trade war.

I find that worrying, essentially because the noises coming out of Washington seem to violate the Weinberger Doctrine rules of military war: I don’t think the U.S. is clear on where its national interest lies, what its objectives are, how they’ll be achieved, or how much it’s prepared to sacrifice in the process.

I think your view is that a more confrontational approach is overdue, and that this dispute can be both beneficial and winnable. First, what does the U.S. need to get out of this process?

Christopher Balding: It’s fair to say that the Trump administration’s preparation and messaging has been scattershot at best. But that doesn’t mean that Trump is wrong on the fundamental problems or in confronting China about its trade and investment policies.

The goal of the post-World War II order, led by the U.S. and its allies, has been to reduce trade barriers, expand cross-border investment, and uphold the rule of law. It has been one of the great accomplishments of global governance, promoting economic and political freedom worldwide.

China has made no secret of its distaste for this order, or of its hope to remake the system in its own authoritarian image. The International Monetary Fund recently found that China is not only one of the most restrictive major economies — but even one of the most restrictive among emerging markets. How Trump is approaching this confrontation leaves a lot to be desired. But that does not mean he shouldn’t be doing it.

Fickling: I don’t think China is quite as unique or stalwart an opponent of the post-war economic order as you make out. Its trade-weighted tariffs now rank between Australia and Mexico, and well below the likes of India, South Korea and Indonesia. In terms of intellectual-property protection, the U.S. Chamber of Commerce essentially grades China as “most improved” among emerging economies, though still with a way to go.

My view is that this progress can continue on a lot of issues — as we’ve seen with China’s reforms on auto joint ventures and tariffs, financial services, and the “negative list” of sectors closed to foreign investment.

The area where I can’t see compromise is the role of the Chinese state in the economy, which seems to be a big issue for Washington. That’s part and parcel of China’s authoritarianism and a bad thing, but I don’t see any chance of Beijing compromising on it. If one of Washington’s goals is “changing China’s constitutional set-up,” that’s not a realistic objective — and wars with unrealistic objectives don’t tend to turn out very well.

Balding: In China, there’s an unusually large gap between official policy and observed reality. As any foreign businessperson will tell you, explicit tariffs aren’t the problem. Unofficial nontariff barriers, unwritten administrative measures, and the accompanying lack of transparency stymie foreign businesses more than official tariff rates do.

China has made liberal use of spot health inspections on South Korean grocery firms that cooperate with Seoul on missile defense. Nearly 20 years after China supposedly agreed to grant market access to foreign payment providers, Visa Inc. and Mastercard Inc. are still wondering when they’ll be allowed in.

This gets to the heart of Trump’s complaint. China has long ignored its own commitments on trade, investment and legal matters, preferring to pressure complainants with opaque administrative barriers. It has tried to weaken the rule of law and prevent firms from challenging its authority. Joining the liberal order means agreeing to methods of dispute resolution and economic openness that China refuses to accept. That’s a fundamental problem.

Fickling: China clearly isn’t an easy market to navigate, and its growing authoritarianism is worrying. But while the risks are great, so are the rewards, and dealing with such difficulties is part of doing business in foreign countries. China isn’t the only one to impose nontariff barriers: Until 2010, my home country of Australia had banned imports of New Zealand apples for nearly a century for spurious biosecurity reasons.

In spite of the challenges you highlight, China is the biggest market for Intel Corp. and Volkswagen AG, and the place where Apple Inc. assembles most of its iPhones. Foreign companies want to do more business there, not less. The U.S.-China Business Council, for one, has been pretty clear that an aggressive approach on trade may do its members more harm than good.

China doesn’t always play by the rules, but companies doing business there seem to regard that as a manageable problem, rather than a fundamental one. I think they also see that a country with China’s sense of history isn’t going to respond well to being browbeaten by foreign powers in the name of free trade. My worry is that, given this backdrop, the country that ends up with its nose bloodied in any trade conflict will be the U.S., not China.

Balding: I’d argue that foreign businesses, if they’re even allowed in China, are much more concerned than you suggest. The European Union Chamber of Commerce in China has been complaining of “promise fatigue,” while foreign direct investment into China has been growing by a mere 3 percent annually this decade. Foreign businesses have been squeezed out of many industries, from financial services to technology, and China has made clear that it has no intention of significantly changing its behavior.

Nor should we be blinded by market size. We should affirm the values of the liberal order that China opposes — and just because some foreign businesses make money in Beijing doesn’t mean that there’s market openness or meaningful competition.

One reason I’m willing to abide Trump is that this is a much more profound conflict than a simple trade dispute. There are immense differences of opinion between China and most other countries about how the international system should work. The more China is allowed to intimidate others and expand its protectionist policies, the more difficult it will be for any president or coalition to challenge it in the future.

I agree that Trump is an imperfect candidate to lead this confrontation, and that there are many risks to his approach. But allowing China to persist with these policies represents a systemic threat to the international order.

To contact the authors of this story: David Fickling at dfickling@bloomberg.net Christopher Balding at cbalding@phbs.pku.edu.cn

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