Thursday, 2 August 2018

Nobody Wins a Trade War by Ken Davies

This article appeared in China Watch on July 18th, 2018:

Freer trade has boosted world output and helped keep store prices low. Although there has been some “hollowing out” of manufacturing industry in advanced economies, this has generally been more than compensated for by growth in the services sector. The lowering of barriers to trade and investment has increased competition, so domestic producers cannot stand still, but have to innovate, enhance product quality, and improve customer service.
At the same time, the march of automation has rendered many of the old manufacturing processes and jobs redundant, so repatriating them is not an option, although this basic truth has not yet filtered through to many disgruntled voters and the politicians who thrive by sowing illusions among them.
Doesn’t the US have a problem with Chinese firms appropriating the intellectual property of US firms? Yes, it does. But so do other countries that trade with and invest in China – and so, importantly, does China itself. Let’s take a look at that issue, and how it is related to China’s central economic strategy, Made in China 2025.
Fears over the Made in China 2025 plan are misplaced. Just as the US has an America first” strategy, China also wants to develop into a high-tech economy by virtue of its own efforts. Critics of China’s previous labor-intensive export-manufacturing strategy might indeed be expected to welcome, not oppose, this.
It is also not unreasonable for China to seek technology transfer wherever possible. The US, Japan, South Korea, and other countries did this when they were industrializing after Britain’s industrial revolution.
At the same time, it is also not unreasonable for foreign investors to resist attempts to force them to transfer technology unwillingly, without compensation, or without their knowledge.
As I have explained in several landmark reports for the OECD (in 2002, 2006, 2008, and 2013), lax enforcement of China’s laws on intellectual property rights is a problem for all firms in China, especially domestic start-ups and small businesses, as well as for foreign-invested enterprises.
However, slapping tariffs on China’s exports to the US will not solve this problem. What is needed is a determined effort by the Chinese government, in consultation with its trade and investment partners. Where laws have been broken, whether in China or in these other countries, they should be upheld by strict investigation and enforcement.
The US government argues that China engages in unfair trade practices, such as subsidizing exports to undercut prices in the US market. Where this amounts to dumping (for example, selling below cost price), the US is fully entitled under WTO rules to impose specific tariffs and pursue a case against China at the WTO. But this is not the same as setting a high tariff across the board, on all $500 billion of imports from China, as the US is currently threatening to do.
It is good to see China now starting to champion the rules-based international order. Developed countries have for several decades been striving to welcome China into that order, with uneven results. Undoubtedly, this is part of a strategy to isolate the US by taking advantage of its hesitant and hopefully temporary withdrawal from the role of leader of the free world. However, for this belated conversion to be effective, the US has to be brought back into the fold. As I have frequently reiterated in these pages, it is better to negotiate than to fight. A trade war will hurt us all.
Ken Davies is a former chief China economist for the Economist Intelligence Unit (EIU). The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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