In the on-going tariff tit for tat between the U.S. and China, labeling China as an unfair player and the guilty party has become fashionable. China has been accused of, among many things, ripping off the U.S., forcing foreign businesses to transfer technology, and being mercantilist in trade. Yet a closer look shows that these accusations are wrong.
Accusation 1: China has taken advantage of the US and caused the huge trade imbalance
Many economists pointed out early on that the China-U.S. trade imbalance was mainly caused by the two countries’ different economic structures and industrial competitiveness and the international division of labor. The ultra-low savings rate in the U.S. as well as the dollar’s role as a major international reserve currency are also important factors. In addition, the U.S. restricts exports of high-tech products to China. Such restrictions have further compounded the trade imbalance.
Foreign businesses account for more than half of China-U.S. trade. In particular, on the list of the $34 billion worth of Chinese products subject to higher tariffs, more than $20 billion of them are produced by foreign companies in China, many of which are American. For example, China and the U.S. take 5% and 84% respectively of the profits from a $450 suit exported from China to the U.S. But when it comes to statistics, the $450 is registered as China’s surplus and the US’s deficit. While the U.S. itself is taking away much of the benefit, it is blaming China for the deficit.
Average Americans have benefited from trade with China. It is true, the U.S. has been running a big trade deficit with China. It can be argued at the same time that American families have enjoyed cheap yet quality Chinese products and the entire country has been able to keep an ultra-low inflation rate over the years. Statistics show that every American household saves more than $800 on average every year because of China-US trade.
Accusation 2: China has stolen US intellectual property and forced US companies to transfer technology
The Chinese government claims it has never forced foreign businesses to transfer their technology. In fact, over the years, developed countries have taken the initiative to share their technologies with developing countries in exchange for access to the latter’s market. This is the usual practice in international economic cooperation and a natural outcome of the international division of labor and the evolution of global supply chains. The commercial contracts have been made voluntarily by both sellers and buyers.
Since 2012, the sales volume of the top 50 U.S. businesses in China has been growing by 12% on average year-on-year, much higher than the 9% for local Chinese companies and 5% for European companies. With handsome returns in hand, more than 85% of American companies have expressed their willingness to invest more in China. No company would accept “forced technology transfer”, no matter how big the market is.
Former U.S. Treasury Secretary Larry Summers has noted that “Chinese companies’ leadership in some technologies is not the result of theft from the U.S...It’s coming from an educational system that’s privileging excellence, concentrating on science and technology.” Despite this observation, some simply refuse to recognize China’s technological and industrial progress and instead choose to conduct a smear campaign against China not based on facts, but on deep ideological bias.
China has taken steps to shore up its IPR protection scheme, including establishing specialized IPR courts. And it has announced stiffer punishment for IPR crimes. In 2017, China paid $28.6 billion worth of IPR royalties, a 15-fold increase from 2001 when China joined the World Trade Organization. China also filed 51,000 patent applications through the Patent Cooperation Treaty, second only to the US.
Accusation 3: China is not opening its doors to foreign investors.
China’s economic success is not the result of “mercantilism” or so-called “state capitalism”. Rather, it is the outcome of its commitment to market-based reform and opening-up.
For instance, China is opening wider to the outside world like never before. The latest Special Administrative Measures (Negative List) on Foreign Investment Access has downsized from 63 to 48 items and cut restrictive measures by 25%.
Since 2010, China has received more than $110 billion in foreign investment annually, the highest amount amongst developing countries. According to the World Investment Report of the UN Conference on Trade and Development, China ranks as the second world’s most attractive investment destination in the world and remains the world’s second largest recipient of FDI.
By contrast, the U.S. is closing its doors. Up till now, it still refuses to increase civilian high-tech exports to China and has kept tightening its visa policies. It labels many countries as foes and slams shut its doors, turning its back against international treaties and organizations and increasingly taking an isolationist approach in world affairs.
The basis for a trade war against China is flimsy. Almost everybody agrees that no one will emerge as a winner from a trade war in this globalized and highly interdependent world. It is highly likely the U.S. will drag the world economy into the “Cold War trap”, “recession trap”, “anti-contract trap” and “uncertainty trap.” The U.S. might pay a high price for its misguided behavior.