How China Cheats

China India borderPresident Trump is heading to Asia, with a stop in Beijing. At the same time, his administration is considering unprecedented U.S. trade action against China. While being wined and dined, the president should keep sight of long-standing Chinese predatory economic practices, to which an American response is long overdue.

The starting point is that the Chinese government is the world’s undisputed leader in being able to subsidize. When it wants production to ramp up, it can grant free land, free energy, and repayment-optional bank loans to firms making what Beijing wants them to make.

China has been picking out economic sectors to support for decades. In 2015 it identified a new set of more-advanced industries to heavily subsidize for the next ten years, including robotics, aviation equipment, new-energy vehicles, and biomedicine.

By itself, this industrial policy is just China’s problem. And Beijing almost always targets areas in which it anticipates high domestic and foreign demand. Unfortunately, (i) the forecasts are often wrong and (ii) when China’s own demand proves to be low, the excess supply is dumped into global markets. This harms American companies and workers.

There are additional problems. Ruling the clothing world helps only a little when you want to dominate industries that use more-advanced technology. Conveniently, China is also the world’s undisputed leader in stealing technology, usually through cyber means and often from the U.S. China overproduces manufactured goods and progressively marches up the technology ladder, speeding up the process by stealing as needed.

At the same time, it keeps the home market partly closed. The direct method is to bar state-owned enterprises (SOEs) from ever failing due to competition. In 2015, Chinese SOEs were not allowed to lose in 22 major sectors, at the expense of American producers of goods and services. China believes in competition — for everyone else.

The U.S. response to Beijing’s strategy can be fairly characterized as pathetic. Cheap Chinese imports can benefit Americans, but there is only loss when American exports are not allowed to compete against Chinese SOEs. No president to date has made the simple point that China can either change on this score or expect the same kind of treatment it doles out, with its sales here limited accordingly.

The U.S. stance on cyber and technology theft might be worse. Despite evidence of tens or even hundreds of billions of dollars in Chinese theft of intellectual property (IP), the only American retaliation has been threatening to arrest people residing safely inside China. The Trump administration is now considering a serious response on IP. This should have been done a decade ago.

With regard to imports, the U.S. has tools to fight Beijing’s subsidies. But it struggles with transshipment — goods produced in China and then shipped here through third countries. Further, Chinese companies are now global investors. When tariffs affect goods made in China, these companies can produce more in other countries even while they still receive subsidies at home.

Chinese firms thus have the capacity to control American and global markets for a variety of goods while using regulations to ensure control of their own large market, along with state-sponsored technology theft and third parties to circumvent American trade actions. A current example is solar energy, where the last two U.S.-based panel-makers are asking for a remedy against China-directed imports.

In this case as in others, there is another side to the argument: Cheap imports mean more affordability here. This is usually true, but it may not be true when China is involved. Chinese Vitamin C makers have admitted that they raised prices after taking over the U.S. market, eliminating the original benefit for Americans.

This led to a much bigger problem: Last year an American court knowingly let the Chinese vitamin makers off the hook. It ruled that the firms could not be punished because the Chinese government ordered them to violate U.S. antitrust law, and “China’s interests outweigh whatever antitrust enforcement interests the United States may have.” In other words, obeying the Chinese government outweighs obeying American law, and a government that subsidizes, steals, and bars competition in its home market is now allowed to order higher prices in the U.S.

When President Trump returns from Asia, he and Congress will face difficult trade decisions. If the U.S. again does nothing to try to force Beijing to shift policies, there will be more subsidies, more cyber-theft, more unbalanced market access, and fewer jobs here. Americans may get cheaper goods out of it — or China may decide that’s no longer on the table either.

From - National Review - by Derek Scissors

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