China is playing the West for fools
Credit: Xinhua/Yao Dawei   

Until now, Donald Trump’s incipient trade war with China has been notable for its ineptitude. The list of demands presented by the US delegation in Beijing included a US$200 billion reduction in the trade deficit within two years, and the overnight scrapping of several libraries’ worth of trade and investment regulations that have been carefully crafted by Beijing to favour Chinese companies.

No Chinese leader, would accept them, and certainly not a muscular nationalist like Xi Jinping, who already hopes that history is going his way.

Trump’s  behaviour continues to create winning scenarios for China, allowing it to pose as a staunch defender of global free trade, while continuing its harmful, restrictive practices

This is a missed opportunity to tackle significant problems in China’s trade and industrial policy – problems that urgently need a response, not only from the US but also from other advanced economies that have suffered by it and stand to suffer further. But Trump’s  behaviour continues to create winning scenarios for China, allowing it to pose as a staunch defender of global free trade, while continuing its harmful restrictive practices.

To develop an effective defence of their interests, China’s trading partners need first to abandon some illusions. In the 19th century, an excited British textile manufacturer dreamed of the fortunes that would be made in Lancashire if every “Chinaman” were to add just one foot to the length of his shirt tails. This mix of hope and ignorance lingers on: the persistence of it in the face of reality is testament to China’s skilful deployment of its most powerful weapon – the irresistible attraction of market opportunities in a country home to one fifth of the world’s population.

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So let’s be clear: yes, the market is huge. No, China does not intend to open it in ways that will assist the US, the UK or any other advanced economy.

What is likely, particularly in a weakened post-Brexit Britain, is China’s continuing effort to use the UK as a bridgehead. It has already happened with China’s nuclear industry with Hinkley Point and the promise to China that it will be allowed to build and operate nuclear plants in the UK; with digital infrastructure (the Huawei-BT deal), and now, the MOU that Liam Fox has just signed with Tencent, a Chinese digital services giant that answers directly to state security in China.

Anyone who still imagines that as yet untapped markets beckon in China for Brexit Britain should pay close attention

China’s policy is not a secret: it is clearly set out in a string of documents that detail the regime’s industrial masterplan. These include the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020), the State Council Decision on Accelerating and Cultivating the Development of Strategic Emerging Industries (SEI Decision), and, the shortest and most succinct iteration, the Notice on Issuing “Made in China 2025” published in 2005.  This is not light reading, but anyone with an interest in the shape of the future China envisages would be advised to take a look. In particular, anyone who still imagines that as yet untapped markets beckon in China for Brexit Britain should pay close attention.

In them, the Chinese government helpfully lays out its strategy: to keep barriers to the China market high, to enforce technology transfer and to acquire foreign companies that possess advance technologies, all to help China leap-frog the risky and difficult innovation stage, to upgrade its industrial technologies and to become dominant both domestic and global markets. Extensively recorded elsewhere, is the third route to the acquisition of advanced technologies – industrial and digital espionage.

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The starting point for China’s vision is uncontentious: by pursuing a traditional catch-up strategy, aided by WTO membership and globalisation, foreign investment, and a huge and hardworking population, China has attained middle-income status, become the world’s second largest economy and accumulated a substantial, though not inexhaustible, war chest of foreign currency to spend.

But the next bit is tricky: growing from poverty to middle-income status is relatively straightforward; getting through the middle-income trap to become a rich country is tougher, especially when burdened with an ageing population, incumbent resistance, a shrinking workforce, too much debt and a legacy of industrial damage to the country’s life support systems.

Some countries make it; most have not. According to The World Bank’s China 2030 report, published in 2013, of the 101 economies classified as ‘middle-income’ in 1960, only 13 had become ‘high-income’ by 2008.  The advice of a paper published last year by the Asian Development Bank was that “the starting point… has to be the existence of political will to embark on an innovation-focused strategy with the requisite active policies to implement it”.

The end result of China’s strategy, if successful, will be the loss to advanced economies of hard-earned competitive edge

That is a lesson China has taken to heart, realising that it needs to upgrade its industrial technologies and raise its productivity as fast as possible and China deploys every means at its disposal to achieve it – begging, borrowing, acquiring and, yes, stealing advanced technologies from those who have them, in a range of practices, some of which are illegal under WTO rules and most of which are characterised as unfair. The end result of this strategy, if successful, will be the loss to advanced economies of hard-earned competitive edge. It is a prospect that has provoked alarm not only in the US but also in Europe.

Every country is entitled to upgrade its technology and to grow. The contentious point for China’s partners and competitors is how it is done. China deploys a wide range of restrictive practices: compulsory joint venture arrangements that only win regulatory approval if they involve technology transfer; digital industrial espionage on a grand scale; and the targeted acquisition of high-tech companies while reciprocal investment into China is prohibited. This is not so much an uneven playing field as a cliff face that foreign competitors are obliged to climb, in the hope of reaching the sunlit uplands of the huge Chinese market.

It’s a Morton’s Fork dilemma, as many western partners have testified: they either hand over their most valuable asset in the hope of accessing one of the world’s largest markets, or they stay out, and wrestle with the downside of exclusion.

The issue is less about the current balance of trade than who owns the future

The impacts are documented in the US Trade Representative’s Section 301 Report into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, and it is clear that the serious issue is less about the current balance of trade than who owns the future and how the game is played.

Made in China 2025 highlights high-tech industries, automotive, aviation, machinery, robotics, high-tech maritime and railway equipment, energy-saving vehicles, medical devices and information technology among others, with the ambition of achieving future market dominance in these areas. The ambition is import substitution and the terms employed – “indigenous innovation” and “self-sufficiency” – are no more concealed than the targets set out to achieve them. These include a deadline for increasing the proportion of domestically produced components to 70 per cent by 2025, enabled by large subsidies and low-cost government backed finance to favoured Chinese enterprises.

The second aspect – making life difficult for foreign operators in China, is also copiously documented. As a recent report from the Berlin-based MERICS think tank put it, while Chinese high-tech companies enjoy massive state backing, the foreign counterparts face:

“The closing of the market for information technology, the exclusion from local subsidy schemes, the low level of data security and the intensive collection of digital data by the Chinese state. As China’s own smart manufacturing capabilities mature, it is likely that the Chinese state will further step up its discriminatory practices and restrictions of market access in the field of smart manufacturing.”

The outbound aspect of Made in China 2025 is the acquisition of international high-tech companies, facilitated by the open nature of advanced economies. But China’s acquisitions are directed by state strategy, funded with capital that hides behind opaque investor networks. As the MERICS report points out:

“In the long term, China wants to obtain control over the most profitable segments of global supply chains and production networks. If successful, Made in China 2025 could accelerate the erosion of industrial countries’ current technological leadership across industrial sectors. As illustrated by the fierce discussions surrounding recent high-profile high-tech acquisitions, governments in Europe and the U.S. increasingly perceive this dimension of China’s quest for technological upgrading as a crucial and pressing challenge.”

There are many possible responses. Unfortunately President Trump is unlikely to choose the most effective: a firm alliance with the EU and other powerful trade partners to enforce and defend the rules.

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