Viewing Trade Barriers From Both Sides

  • Viewing Trade Barriers From Both Sides
  • Side-effects of China’s Deleveraging Agenda

Mutianyu (慕田峪) is a particularly well-preserved section of the Great Wall of China, about 40 miles from the nation’s capital. During a rare free afternoon in Beijing earlier this month, I decided to ditch my e-mail mountain to visit one of the “New Seven Wonders of the World.” It was a wise decision. The day was clear, the crowds were light and the views were spectacular.

Construction on the Great Wall began more than 2,000 years ago, to protect China from outsiders. Standing atop the structure, I certainly didn’t see Mongolian hordes threatening invasion. But the Wall can be viewed a symbol of China’s longstanding aversion to foreign influences. A modern version of the Wall is used by Chinese authorities to control trade; at the moment, that barrier is under renewed siege.

The visit to Asia offered me the chance to get an Eastern perspective on the recent escalation of global trade frictions. As you might imagine, there is a significant difference of views with the West, which must be reconciled to avoid an all-out trade war.

Like other countries in Asia, China has used exports as an avenue to economic development. Taking advantage of low labor costs, Chinese factories gained market share steadily from 1970 to 2000, and then went into overdrive after China was admitted to the World Trade Organization (WTO) in 2002. This mercantilist orientation generated substantial trade surpluses, both overall and with the United States.

Cries of foul escalated with China’s share of industrial markets. Over the years, detractors have claimed that China’s environmental laws are too lax, its support of local companies is too generous and its currency is too cheap. China’s appropriation of intellectual property and its selective use of regulation to hinder foreign companies has also been a source of concern. What Beijing has called “capitalism with Chinese characteristics” is seen by many in the West as simple central planning and protectionism.

To keep markets truly open, WTO members are expected to limit government restrictions on commerce and capital. China’s practices have been persistently viewed in the West as too restrictive. While the United States has been the tip of the spear, many countries feel strongly that China has not fulfilled its commitments to become more open.

The view from the Far East is that trade restrictions are not the main cause of global imbalances. When countries that save a lot trade with countries that save very little, the first will inevitably develop a trade surplus. The American saving rate is roughly ten times smaller than China’s; hence the asymmetry in trade flows. As China has become wealthier, its collective consumption has grown. But consumption still represents a much smaller share of China’s gross domestic product (GDP) than it does in the United States.

The Chinese further contend that the United States is a far bigger transgressor in the trade arena. In fact, the number of WTO cases naming the U.S. as respondent is more than three times higher than the figure for China. (And this reading pre-dates the grievances that will almost certainly be filed by Canada, the European Union and others
in response to recent trade actions taken in Washington.) The administration has justified
many of its actions on national security grounds, which Asian audiences see as a stretch.

For the last two years, China has been claiming the mantle as the world’s leading proponent of free trade. But that claim must be viewed cautiously. While tariffs around most of the world have collapsed over the past 30 years, the Chinese have sustained tariffs at relatively high levels. And while most nations have divested government ownership of leading companies, the Chinese continue to own and influence their national champions to a substantial degree.

A prominent manifestation of China’s industrial policy is “Made in China 2025,” which seeks to make the country the world’s premier developer of robotics, artificial intelligence, e-commerce and the platforms required to operate them. These industries are poised to drive growth in the coming decades. To advance its aspirations, the Chinese government has taken stakes in leading companies and made it difficult for foreign technology firms to gain a foothold.

Made in China 2025 also takes direct aim at a space currently dominated by the United States, and which has strategic implications. So it is not surprising that the technology sector has been the target of initial rounds of U.S. tariffs. Westerners also note this as a prime example of China’s anticompetitive practices, which they contend will only be corrected through aggressive action.