It's Time to Stop Talking to Beijing and Start Disengaging from China’s Economy
China's politics are such that China's ruler is in no position to negotiate in good faith with the United States.
There was virtually no progress on “structural” issues in the just-concluded U.S.-China trade talks in Beijing, and unfortunately there won’t be any unless President Donald Trump decides to walk away from the ongoing negotiations.
Xi Jinping, the Chinese ruler, is in no position to negotiate in good faith with the U.S., in large part due to Communist Party politics. Trump, therefore, has to either abandon his ambitious trade goals or push Beijing to the edge of the cliff.
U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin met Xi on Friday and the talks head for Washington next week.
“I hope you can make persistent efforts to push forward an agreement that can benefit both sides,” Xi said, according to state broadcaster China Central Television. “We all think that in terms of maintaining the prosperity and stability of the world, as well as promoting global economic prosperity and development, our two countries share broad mutual interest.”
China and the U.S. “share broad mutual interest”? Actually, both countries, at far different stages of economic development, do not.
The conduct of China’s senior leaders betrays a belief that they calculate their interests in ways far different than their American counterparts. After all, over the course of decades, the Chinese party-state, either directly or through enterprises and affiliated concerns, has stolen trillions of dollars of U.S. intellectual property.
How much? The 2017 update to the report of the Commission on the Theft of American Intellectual Property does not include a specific estimate of Chinese theft, but an answer can be pieced together from information it does provide. The Blair-Huntsman report, as it is commonly known, estimates that “the annual cost to the U.S. economy” from the counterfeiting of goods, the pirating of software, and the theft of trade secrets exceeds $225 billion and “could be as high as $600 billion.” This estimate does not include the full losses from patent infringement.
China’s take from these actions, which are criminal, is high. The country remains, the updated report notes, “the world’s principal IP infringer.” One indication of the size of China’s crime is that it accounts for 87 percent of the pirated goods seized entering America.
This theft, which has continued decade in and decade out, is certainly directed from the top of the Chinese political system. As Washington, D.C.-based trade expert Alan Tonelson told The Daily Beast, “China’s grand strategy is literally to steal its way to global technological supremacy through intellectual property theft, technology extortion, and other predatory practices.”
The Chinese flaunt their grand strategy. Hu Jintao, Xi’s immediate predecessor, sponsored the questionable “indigenous innovation product accreditation” rules that would have forced the surrender of technology. Xi has his now-infamous “Made in China 2025” initiative, but it is apparent China cannot meet Xi’s ambitious timetable to dominate 11 tech sectors unless Beijing continues to take intellectual property from outside. Chinese hacking for commercial purposes seems closely related to CM2025, as the plan is known in China.
Moreover, Xi has other reasons to double down. Since becoming Communist Party general secretary in 2012, he has adopted a state-dominated economic model, a program in some ways similar to Mao Zedong’s early-1950s industrialization efforts. For instance, Xi, like Mao, has sought self-sufficiency.
Xi has staked his precarious-looking position atop the Chinese political system on the success of his Maoist-inspired efforts, so if he reverses course by accepting Trump administration demands he could fall from grace. He is already being blamed for “losing America” with provocative policies, and that means he has little choice but to prevail. Xi has, by centralizing power, also centralized accountability, and that means he is all-in. His plan succeeds or he succumbs to the many political enemies he has created with his almost unprecedented purges.
Xi’s boldness puts the Trump administration in an uncomfortable position. The equity markets may demand a deal with China, but Trump cannot agree to just any old arrangement that leaves Xi’s pro-China policies in place. For one thing, Trump is concerned that Democrats will second-guess him. On Friday, he publicly suggested bringing House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer into the negotiations with Beijing to minimize sniping.
Trump is in many ways in a no-win situation. He will not be able to obtain a “real trade deal” as he called it Friday, and not even stop-gap Chinese pledges to buy more American products are sustainable. It’s not clear a weakened — and likely contracting — Chinese economy has the ability to comply with such promises, but it is clear that these promises would not survive a World Trade Organization challenge. Such promises are “discriminatory” on their face and therefore can be undone by any of the other 162 WTO members.
There is one solution for Trump that at the moment is unpalatable to most American policymakers.
“It’s high time that the Trump administration recognizes that there is literally nothing to talk about on the China trade front,” Tonelson said this week. “The only sensible China policy approach for America is to disengage economically as thoroughly as possible, reinforce ties with more reliable trading partners, and capitalize on its own immense potential for greater self-sufficiency.”
Whether or not there is a temporary trade truce, the U.S. at some point will disengage its economy from China’s largely because Xi Jinping’s breathtaking ambitions will make it impossible to maintain acceptable trading relations. Companies, especially low-cost manufacturers but even brand names like GoPro, are already moving links in their supply chains out of China largely because they foresee continuing friction between the U.S. and China. And they are probably correct in this view because Washington’s goals and Beijing’s are mutually inconsistent.
Disengagement is not now the preferred policy option in Washington, but that is the direction America is moving. Why? Disengagement is the only strategy with China that has not yet failed. Attempts at reconciliation have failed, iron-clad agreements have failed, WTO enforcement actions have failed.
Xi Jinping on Friday said “China and the U.S. are inseparable.” No, they’re not. What trade policy once put together it can now tear asunder.