By Peter Morici
October 30, 2016
October 30, 2016
The trade imbalance and a possible showdown in the South China Sea loom large
The new president will face immediate challenges — the war against ISIS, fixing Obamacare and boosting sluggish growth — but the economic and geopolitical challenges posed by an increasingly assertive China are perhaps the most vexing and far reaching for the American economy and global leadership.
Over the last three decades, China has accomplished hyper growth by supplying western consumers with inexpensive products and attracting western investment to participate in the export boom and sell to its growing middle class. Accomplishing all this, it has hardly played fairly according to the established norms of global trade.
According to Hillary Clinton, China subsidizes exports, manipulates its currency and more to the detriment of American workers. She promises to appoint a special trade prosecutor to enforce U.S. rights under international agreements.
Donald Trump would slap on 45 percent tariff on Chinese imports to force renegotiation of those agreements to get a better deal for Americans.
If they are serious, it’s about time.
The $320 billion annual deficit on trade in goods and services with China slashes demand for American-made products, curtails funding for U.S.-based R&D, kills millions of jobs and depresses wages, 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 prosperity and 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, the population of Dongguan, a major manufacturing center near Hong Kong, has fallen from 12 to 7 million over the last decade.
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. Consequently, many products and components used by its basic assembly and fabrication operations, once sourced in the United States and 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 must offer a Chinese joint-venture partner at least a 50 percent stake when investing in the Middle Kingdom.
While Chinese technology still lags western capabilities in many areas both complex and mundane, such as rice cookers, it has managed to leap ahead in some fields — for example, satellite technology for encrypted communications.
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. It has established an Asian Infrastructure Investment Bank, and China is plowing billions of dollars into economies in Asia and Africa through transportation projects and direct investment.
President Obama has been hesitant to take the advice of U.S. defense leaders in challenging China’s artificial island and militarization of the vital South China Sea, and the combination of Chinese muscle and billions in new investment has persuaded longtime U.S. ally, the Philippines, to realign with China.
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 U.N. 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.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.
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