On Dec. 1, 2018, Presidents Donald J. Trump and Xi Jinping met at the G20 Summit to discuss the escalating trade war between the United States and China. The meeting ended with the two global leaders deciding to not impose new tariffs for 90 days. They agreed to a figurative ceasefire.
Both governments are under pressure to find a solution from their respective business communities. Tariffs are not just news headlines; they are also boardroom headlines. Their impact is no longer hypothetical because now companies are reporting actual numbers. Tariffs Hurt the Heartland reports that American companies paid a record $4.4 billion in tariffs in September.
In China, the stock market has entered bear territory, falling more than 20 percent this year. In the United States, stock market volatility increased, with the stock market reaching new high on Oct. 3, 2018, just to fall 9 percent about three weeks later. This rapid decline came during a time when companies were reporting quarterly financial earnings, including comments about the challenges created by the tariffs.
The new ceasefire might calm investors and ease boardroom fears, but can it bridge the vast ideological gap between these two nations? The United States and China see the world very differently from each other. Based on my experience working for an agriculture trade association promoting trade with China, I argue that 90 days of intensive talks will not solve these differences. However, if there is political will to end this trade war, maybe the ceasefire will be extended.
United States’ Objectives
China accepts its status as a developed nation
China is often considered an emerging market because its GDP per capita is only $9,000. But many in Washington believe that China has emerged and should be treated as such. While the GDP per capita is low, the Chinese economy (using GDP PPP) reached $17.6 trillion in 2014, according to the International Monetary Fund. The same report said the United States economy was $17.4 trillion. Part of the label confusion comes from the speed the Chinese economy has grown. In 2005, the Chinese economy was only half the size of the United States economy; in 2017, it was 20 percent larger than that of the United States.
If you visit China, you’ll notice that the extreme wealth, the growth in the middle class, and the hundreds of millions of people living in poverty are easy to spot. During my visits I’ve seen the following:
Wealthy business people telling stories of their success during formal dinner parties and describing their luxury condos in Tier 1 cities like Beijing and Shanghai. They also talk about the ways they are giving back to their home villages now that they are millionaires and even billionaires.
In the cities, the middle class has enough disposable income to purchase cars despite horrendous traffic, to choose to consume meat-based diets, and to afford imported infant formula from Australia, Europe, and North America to ensure it is safe for their children.
The countryside is slow to catch up. Most households farm about one-third of an acre of land. The crops are hand harvested and dried on the pavement, where cars can drive over the grain to crack it.
Which is the real China? On one hand, China has 6 to 7 percent annual GDP growth that makes Western leaders jealous. That growth has resulted in major investments in state-of-the-art high-speed trains, automated ports, and impressive scientific advances that fill international headlines. On the other hand, there are empty “ghost cities” that fill the Chinese countryside, buildings that begin to crumble a few years after they are constructed, and urban pollution that is so bad I wore a medical grade face mask more than once.
Like many in Washington, Trump wants China to be treated like a developed nation. He has taken steps, not limited to only tariffs, to force this change. Earlier this year, Trump withdrew from the Universal Postal Union, a 144-year-old treaty signed by 192 countries to ensure mail can be delivered globally. He claimed the treaty costs the United States Postal Service $170 million to $300 million per year. China Post pays significantly lower rates than the United States because as a developing nation, China gets preferential treatment in this and other treaties. Trump doesn’t think China needs the support to compete with developed countries any longer.
Respect intellectual property rights
Trump imposed intellectual property rights tariffs on China to influence Chinese intellectual property behavior. The decision came after a seven-month investigation by the United States Trade Representative, which determined that Chinese theft of American intellectual property costs American companies between $225 billion and $600 billion annually. Methods of stealing information includes government-sponsored initiatives and forced technology transfer agreements that foreign companies must agree to before entering China.
In Joe Studwell’s How Asia Works: Success and Failure in the World’s Most Dynamic Region, he argues that increasing manufacturing and exporting those manufactured goods while using protectionism has been an essential step in successful Asian economies. Part of that protectionism has included intellectual property theft, a practice undertaken by many of the most successful brands in Asia decades before they eventually became global leaders.
Once developed country status is achieved or forced onto a country, the training wheels come off. Intellectual property rights are respected by companies and governments alike. Chinese technology companies like Huawei, Xiaomi and ZTE are becoming globally recognized and respected brands. They compete with global leaders like Apple and Samsung in terms of size and quality.
If these brands are competing successfully in the marketplace, then the Chinese government should stop protecting those companies from foreign competition. Trump wants to force this change. He appears willing to impose tariffs on all $505 billion worth of goods that Americans import from China to accomplish his goal. He hopes that tariffs will create enough pressure to change Chinese intellectual property laws and behaviors.
Reduce the trade deficit
The trade deficit between two countries is being used to measure the success of international trade between those countries. Americans purchase more goods from China than Chinese purchase from America, creating a trade deficit. It would be difficult erase the trade deficit, and from an economic perspective, this trade deficit is not unhealthy for the United States economy.
Trump wants the Chinese to purchase more goods and services from the United States. Beijing is willing to buy more from the United States as part of a deal to end the tariffs. But Washington wants more than just a one-time purchase order.
To accomplish that, Washington wants Beijing to have less control over the private sector. Government officials in the United States believe free markets should determine how many companies operate in a specific sector and whether they are foreign or domestic. In China, the government and the people both think the government knows best, a way of thinking that is foreign to many Americans.
During an interview, a reporter once asked, “How many seed companies should operate in China?” My answer was, “As many as the market could support.” Pushing for more details, he asked me, “If the United States has about 400 seed companies and has 300 million people, how many seed companies should China have?” I have since learned that the Chinese government issues licenses and could either limit the number of seed companies or provide incentives to increase the number of companies. Many Chinese colleagues believed this system is important, because the government should directly manage the economy, not leave it up to market forces.
Foreigners want to limit this government intervention, specifically because it tends to favor domestic companies over foreign ones, making it harder for American companies to sell in China — which exacerbates the trade deficit.
Playing catch up
Whether China needs economic training wheels or not is debatable. It is undeniable that China enjoys the handicap. Chinese government officials and business leaders from every sector say that China is behind the rest of the world and is merely trying to catch up. China should be afforded the same advantages as the developed nations that came before them, they say. Once the gap between China and other nations is erased, then China will take off the training wheels.
Intellectual Property Rights
The Office of the United States Trade Representative and the global business community agree that China forces companies to transfer technology, that intellectual property laws are weak, and that laws on the books are not enforced. Beijing denies these accusations. Therefore, it is impossible to reach an agreement on structural changes to the Chinese intellectual property system if Beijing will not admit there is a problem.
In 2015, Mo Hailong, Director of International Business of the Beijing Dabeinong Technology Group Company, a Chinese seed company, entered private American farms in the Midwest and stole corn seeds. The FBI investigated and he confessed to conspiracy to steal trade secrets. Americans and the American legal system view this matter as very cut and dry. However, in the years since then, I’ve had a number of experiences that indicate that the Chinese do not share this perspective.
The first happened as part of a conversation shortly after the incident. I was meeting with officials from the Seed Management Bureau, a part of the Chinese Ministry of Agriculture. The head of the delegation asked a large group why it was theft if he only took the seeds for research, an argument heard in the technology sector, too. She was well-versed in international property regimes, especially those for seed, so she understands the problem. However, she justified his behavior by framing the situation from the perspective of a Chinese researcher whose goal is to learn from the American company so that the Chinese could catch up to the quality that American companies produce.
The second situation is one I experienced several times. I organized meetings where representatives from the United States government and industry discuss the merits and importance of stronger intellectual property protection with counterparts from the Chinese government and industry. The Chinese company responsible for the theft mentioned earlier was always on the Chinese invite list because of its prominence in the seed industry. To the Americans present, this company’s attendance undermined the discussions because of its blatant disrespect for intellectual property rights. The Chinese don’t agree; they think that the largest companies should be included, no matter how they achieved their success.
Real Market Access
From the beginning of U.S.-China trade talks, China has offered to purchase more goods from the United States. Offering one-off changes, purchases or concessions is part of China’s M.O. We see this whenever China and the United States meet: Beijing appeases Washington at high-level meetings with specific and targeted offerings. The United States accepts, there is a photo-op, and nothing changes under the surface.
In March 2018, Beijing restructured its federal government, giving the Ministry of Commerce even more control over the private sector. This change highlights that Beijing is not ready to cede its control over the economy yet. Beijing is likely to continue to offer one-time wins in the ongoing talks with Washington. It might promise structural reforms, but it will be difficult for Washington to know if it is getting true market access or just empty promises.
Biotechnology approvals for agricultural companies highlight this struggle. In China, a committee reviews and evaluates biotech applications three times a year. The process is extremely slow and opaque. Washington constantly puts pressure on Beijing to change this system. Faster biotech approvals would give American grain companies greater access to China.
A new trend emerged during President Barack Obama’s administration. After high-level government-to-government policy meetings, the governments would prepare a list of outcomes. Often times that list included the approval of several biotech products, which would be a win for Washington. However, it did nothing to change the underlying approval process. In fact, the biotech approval process appears to have stalled altogether. Now Beijing saves approvals for the next meeting. Beijing knows that Washington will keep putting biotech approvals at the top of its wishlist. Then Beijing can trade the approvals for something it wants in return.
Politics is the combination of facts and emotions
The gulf between China and the United States is dramatic. Both sides will need to make major economic compromises and change fundamental beliefs to resolve this situation.
United States is leveling the field
If China is going to overtake the United States as the largest economy in the world, then Beijing should play by the same rules as other developed nations. Washington is willing to endure some pain to force China into its developed nation status. The gamble is that the American economy can survive the turbulence created by the tariffs. Then when this is over, the Chinese markets will be open to American companies, and R&D investment will not be lost to Chinese theft and knockoffs. The tariffs are a tool that Trump is using to achieve his objectives.
China will change when it benefits China the most
The first thing you learn from veteran observers of China’s economy is that China will change or adopt new policies when it benefits China the most. China’s discipline to advance its own agenda is unmatched. This is true in the current trade environment as much as it was true in my discussions about intellectual property above.
Right now, Beijing is willing to learn what it will take to make the tariffs end. Maybe internal economic pressure has brought Beijing to the table or maybe they’re just curious; only time will tell.
Right now, Beijing is stalling for more time. More time to develop trade agreements with India, the EU, and Russia. More time to finish its Belt and Road initiative, an infrastructure development and investment project connecting China to Europe, Asia, and Africa by both land and sea routes. And more time to undertake foreign direct investment initiatives South America. China is diversifying its suppliers and its customers. Again, China will change when and how it benefits China the most, regardless of the role the United States plays in the future.
Michelle Klieger was the Director of International Programs and Policy for the American Seed Trade Association and served on the board of directors of Asia and Pacific Seed Association.