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Trump must prepare for showdown with China

By Dr. Peter Morici
web posted December 12, 2016

Donald Trump faces immediate challenges—managing the war against ISIS, fixing Obamacare and boosting growth to create jobs. However, as the fallout from his recent conversation with the president of Taiwan indicates, an increasingly assertive China poses the most vexing and far reaching challenges for American prosperity and security.

China has accomplished hyper growth supplying western consumers with inexpensive goods and attracting Western investment to transfer technology.  Accomplishing this, it has hardly played by the established rules and norms of global trade. 

Candidate Hillary Clinton criticized China for subsidizing exports, manipulating its currency and other abusive practices, and promised to better enforce U.S. rights under international agreements.  

Trump promised to slap on 45 percent tariff on Chinese imports to get a better deal through those agreements, echoing a strategy advocated by Mitt Romney.

The $320 billion annual deficit on trade in goods and services with China depresses demand for American-made products, curtails funding for U.S.-based R&D, kills millions of jobs and is a principal cause of the blight in communities like Reading, Pennsylvania and  Hickory, North Carolina.

Just as menacing, the trillions in cumulative trade surpluses China has amassed are financing a dramatic pivot in its industrial, military and foreign policies that threatens security in the Pacific and America’s standing with allies around the globe.

As wages rise in Chinese coastal manufacturing centers, jobs move further west in China and elsewhere in Southeast Asia causing major social disruptions. For example, Dongguan, near Hong Kong, has endured job losses on a scale similar to large Midwestern cities.

To buffer job losses and limit political unrest, Beijing is pursuing a two pronged strategy.

It is imposing tougher restrictions on foreign investment, which further depresses the value of the yuan, ladling on more subsidies for basic manufacturing, tightening administration restrictions on imports and consolidating state owned enterprises to enhance their monopoly power.

Simultaneously, it is encouraging more technology-intensive activities that strike at the heart of American and European competitiveness through lavish subsidies for startups, acquisitions of U.S. and European businesses, and toughened regulation of American and other foreign technology companies operating in China. In the process, many products and components used by its basic assembly and fabrication operations, once sourced in the United States and western Europe, are now made in China.

Most of those tactics either violate WTO rules or are decidedly asymmetrical. For example, the United States, Germany and European nations generally permit Chinese to purchase companies outright, whereas western investors generally must offer Chinese joint-venture partners a substantial stake when establishing subsidiaries in the Middle Kingdom.

While Chinese technology still lags western capabilities in many areas as complex and mundane areas, such as rice cookers, it has managed to leap ahead in some fields—for example, satellite technology for espionage-proof and encrypted communications.

In addition, the cash earned from its huge trade surpluses is financing a massive build up in naval and air power, militarization of the South China Sea and about 20 port facilities the Chinese navy can access in Asia, Africa, the Middle East and Europe.  And it has established an Asian International Development Bank, and the Chinese government and private investors are plowing billions of dollars into the economies in Asia and Africa through infrastructure projects and direct investment.

President Obama has been hesitant to take the advice of U.S. defense leaders in challenging China’s artificial islands and militarization of the vital South China Sea, and the combination of Chinese muscle and billions in new investment has encouraged long-time U.S. allies, the Philippines and Malaysia, to tilt toward Beijing.

The latter substantially undermines the U.S. strategy of resolving the sovereignty disputes in the South China Sea and securing the sea lanes from Chinese control by relying on the recent UN tribunal ruling denying Beijing’s claims and through U.S. military and diplomatic cooperation with regional allies.

The South China Sea has huge sea-bed mineral deposits and is a vital passage for some $5 trillion annually of international shipping. Open access has been secured by the U.S. Navy in cooperation with regional allies since World War II, and the stability of that framework is vital not merely to global commerce but also U.S. credibility with strategic allies in the Middle East and Europe.

The new president must prepare for a diplomatic and perhaps military showdown in the Pacific and confront Beijing on the massive trade imbalance that finances Chinese mercantilism and adventurism.

American prosperity and security depend on it. ESR

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

 

 

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