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Structural And Trade Related Issues In US-China Relations

Summary

The US use of the term ‘structural issues’ seems to be inappropriate and may be confusing to the China team responsible for trade negotiations.

Whatever the perception of the term, it is highly unlikely that China will make other than marginal changes to its core macroeconomic model or substantive way in which it develops.

This paper primarily discusses the matter of 'Structural Issues' which appear to be intractable in the negotiations between the US and China within the overall context of the so-called ‘Trade War’. These issues are distinct from discrete activities considered to be critical to the long-term normal and conflict-free stability of relations between the countries, especially with respect to technologies and platforms for the economy of the future.

Inherent here are matters related to knowhow, core technologies, control of supply chains, threats to national security and defense, the edge with respect to weapon systems, State versus private sector support for R&D and market success, and unimpeded natural competition. What is at stake is which country will assume the leadership role across multiple domains and engage other world economies on the basis of free market principles. The question is whether these concerns are in fact classical national economy related structural issues or a manifestation of an evolving future where technological developments are becoming the currency that determines national strength replacing traditional metrics related to economic performance.

There are ongoing negotiations between the US and China following the December 1 summit in Buenos Aires, and they are expected to run until March 1, 2019. It is likely that each side will be trying to gain an advantage through a variety of means. Irrespective of whatever promises that are made for the purpose of getting a deal, any concessions will probably be seen by the other party and their constituencies as being cosmetic, and not changing fundamental policies, beliefs, and approaches. The hardliners on the US side will not be satisfied and will continue to focus on the main thread of their argument. Their voices and influence will likely surface as instances of potential noncompliance with whatever decisions are reached are known and when they can rally a growing base of academics, business executives, and policy wonks who have soured on aspects of the US-China relationship.

What in fact are ‘Structural Issues’?

In reviewing policy documents regarding the Trade War as well as statements by officials from the US and China and those from a vast army of commentators in the financial community, there seems to be either a lack of understanding or confusion as to what is meant by 'Structural Issues', and the basis upon which the US wants China to alter specific ones. Based on the classic understanding of the term, and just focusing on rhetoric, the default seems to be that the US officials are calling for a fundamental shift or change in the basic ways that China’s market or economy functions or operates. Whether this is the case seems unclear and, in any event, is a non-starter and will be seen as an overreach into China’s sovereignty.

In classic economic terms, structural issues are at the core of an economy and involve:• how prices are set • management of public finances • government-owned enterprises• financial sector regulation • labor market rules and regulations • social safety nets • public institutions, legal institutions, and governance

It may well be that at the margins, China may be willing to expand upon or modify how it manages these foundational factors, but since they are at the heart of an evolving reform process that started 40-years ago, and which is planned, managed, and operated according to processes that are essentially intertwined with the very fabric of how China views and regulates its economy and institutions, within its political framework and core doctrines, it is meaningless for the US side to call for ‘changes’ on a unilateral basis and to set deadlines that are hollow.

It needs to be pointed out that there was to be a forum for the apparent discussion of structural issues—a renamed Comprehensive Economic Dialogue that had replaced the Strategic and Economic Dialogues. However, the Trump Administration suspended and waylaid this platform in the favor of other forms of interaction. [See End Notes: 1] From reports, it seemed that this forum could have served a meaningful purpose by separating the longer-term real structural issues from those considered to be of a ‘Soft index’ nature such as cybersecurity, IPR theft and violations, forced technology transfers, and non-tariff barriers. In this way, concrete progress could have been made on issues that are more suitable for traditional commercial and diplomatic negotiations, showing that the parties can work out their differences.

How the US and China define Structural Issues

A review of various official US publicly released documents related to US-China trade issues since the start of the Trump Administration did not disclose any thorough analysis of the US view of what are specifically considered to be foundational 'Structural Issues', how they may give China an unfair advantage, what should be done about them, and what the US side would be looking for as a result. Instead, the main focus in trade policy reports and statements by US government officials is on the aforementioned well-tread ‘Soft index’ issues. [2] The exception is from David Malpass the Treasury Undersecretary who stated “Chinese leaders are exerting too much government control over the economy’ [1] but it should be noted that when power players on the US team are being assigned to their respective camps re dealing with China, there is no mention of him, his role, or ability to influence Trump.

China appears to recognize that there is a conflating by the US of its economic structure with the ‘Soft index’ issues but does not directly state that the foundational elements are a separate matter, open to discussion and mutual understanding, but beyond the scope of any trade related issues that may be impacting relations between the two countries.

State plans

Although there are references in US reports to the many State directed plans developed by arms of the Chinese Government, especially from the National Development and Reform Commission (NDRC), Ministry of Science and Technology, and the Ministry of Industry and Information Technology, it is unclear if the legacy process is well understood as well as the involvement of a vast array of government units that are involved in the formulation, review, approval, and implementation. The planning has evolved over about a 60-year + period and has a well-engineered process that may take into account the then current leadership governing dogma and priorities for China, while staying the course as to producing an end product that the whole of the Chinese Government adopts.

This is important to note because the plan that the US side seems to find the most objectionable is Made in China 2025. It came about during the normal course of government units undertaking their responsibility for guiding China’s future economic development according to an established process, much like prior analogous high technology plans including the 863 State High Tech Development Plan and 973 National Basic Research Program. They did not come under the same high level of criticism from previous US administrations or the business community.

Various news reports are to the effect that China will replace the Made in China 2025 policy and will allow foreign companies to participate. This is being cast as a major win for the US side and for those Chinese officials who wanted to reign it in to control a misallocation of resources and an over capacity in manufacturing operations. Instead, a to-be-revised policy for release in the coming months will supposedly refer to quality metrics instead of the focus being on purely numerical hard targets for the domestic control of various manufacturing technologies. It should be noted that the use of quality metrics is consistent with China’s push to use such following decisions within the NDRC relating to aspects of the national economy including GDP. Also, changing the policy which may just be a modification of objectives is not the same as changing a complex plan—which is in fact Made in China 2025.

It is highly unlikely that China can easily replace a plan that has been in force since 2015 without major disruption to its core interests of driving self-sufficiency, coming up the value chain, and developing critical knowhow across multiple domains including bio- pharmaceuticals, agricultural machinery, transportation, robotics, new materials, and new energy vehicles. Most likely China will cast any change(s) as a next natural evolution in the reform program and recognition of the important role that private sector companies can play, even foreign ones. Certainly China will not abandon the plan as it could be seen as setting as dangerous precedent as to its sovereignty and allowing interference in its internal affairs. Here it is noted that Xi Jinping in his speech on December 18th to celebrate the 40th anniversary of the Party communique regarding ‘opening and reform’ stated that “No one is in a position to dictate to the Chinese people what should or should not be done.” and, “We will resolutely reform what should and can be reformed, and make no change where there should not and cannot be any reform." The message is clear that China will not be bullied.

It can be pointed out that although the US may not have a comparable process to China for the development of national level or sector level plans along with the directed allocation of resources and the preordination of winners through a variety of subsidies, tax breaks, financing, and noncompetitive procurement orders--so-called State capitalism—there are certainly analogous aspects across the federal establishment, including:

• Annual Budget• Critical S&T plans developed by the DoD, NASA, NIH, DOE• Advanced manufacturing strategy and plan• Major weapons and information system related procurements especially in the defense and intelligence communities that are highly restricted with limited or no real competition• A variety of set asides or sole source contracts to favor certain companies

What’s next

How the Trump administration deals with China during the negotiations period will indicate whether the US side is looking for long-term meaningful solutions to trade related issues and other matters that have been subsumed within the current state-of-play between the US and China and brought to a head by the Trump administration, for whatever reason ---or---China will serve as a convenient target for purely political reasons and as a convenient distraction from the Mueller/other Department of Justice, New York Attorney General, and expected House Democratic investigations. At the very least, the US side needs to speak with ‘one voice’, focus on what’s doable and possible to ‘get to yes’ versus including issues which are known to be non-starters such as changing China’s economic system. Incremental progress will buoy financial markets worldwide and help to tamp down tensions in the relationship.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.

End Notes

1. Treasury official backtracks after saying he'd ended economic talks with ChinaDavid Malpass, the Treasury Department’s undersecretary for international affairs, told a conference of bankers here that he had ended the U.S.’s “Comprehensive Economic Dialogue” with Chinese officials because discussions had stalled during a meeting in 2017.The reasons for the tensions are complex and have to do with the Trump administration alleging Chinese leaders are exerting too much government control over the economy.US Ends Formal Economic Talks With China Ahead Of Trade WarsDavid Malpass, Treasury’s undersecretary for international affairs, said that "the administration is disappointed with China and because there wasn’t a path back toward a market orientation, I discontinued the China economic dialogue."2. Section 301 Report into China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation | United States Trade Representativehttps://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdfRemarks by Vice President Pence on the Administration's Policy Toward China | The White HouseRemarks by Vice President Pence at the 2018 APEC CEO Summit | Port Moresby, Papua New Guinea | The White HouseU.S.-China Trade Truce Gives Both Sides Political Breathing RoomMr. Mnuchin suggested that all the tariffs could be phased out as China meets its commitments to make changes over a period of time. It is possible that the initial tariffs on $50 billion of Chinese imports could be in place longer, until it is clear that China has kept its promises of wholesale structural changes.“The proposal that came back and was discussed between the presidents included both reducing the trade deficit and also included very specific structural issues,” he said. “It includes commitments on technology, to currency to cyber. There are a lot of important issues to be addressed here.”U.S. Trade Representative Robert Lighthizer Discusses Trade Issues With ChinaLIGHTHIZER: Well, we need to see structural changes in China or an agreement to have structural changes...KELLY: Like what?LIGHTHIZER: ...And an opening market. So if I could just take a step back and say, how did we get here to where we are - and I would say, first of all, we have a very large trade deficit with China that's been growing. And it's not the result of economic forces entirely. So the president looked at the situation and said the most pressing part of this is the theft and forced technology transfer from the United States companies to Chinese companies. 3. Full Text: The Facts and China's Position on China-US Trade Friction - Chinadaily.com.cnLike other countries, China has the right to choose its own development path, including the economic model, that suits its national reality. Why trade talks are deadlocked: 'US, China are playing by different rules'China has defied the US requirement to overhaul the state-supported economic model, especially in its technology catch-up plan “Made in China 2025”, saying it is defending its development sovereignty and accusing the US of using the trade war as a new containment tactic.On the other hand, the US has voiced discontent about market distortion and unfair competition in favour of domestic champions under China’s state-sponsored economic structure, concerns that are widely shared by other trading partners of China.