By Mike Collins
In 2001 America opened free trade with China and they were accepted into the World Trade Organization. Open free trade with China was supposed to help move China closer to democracy and freedom. President Clinton said “If you believe in a future of greater openness and freedom for the people of China, you ought to be for this agreement.”
It was hoped that free market capitalism would rub off on China.
It has been 14 years since the agreement and open trade has not made them more democratic or free. China surprised everyone by developing their own form of trade which I call Authoritarian Capitalism. Generally they ignore most trade rules and do whatever is to their advantage. Here are some of the features of Authoritarian Capitalism:
- 1. Currency Manipulation – Even though the WTO has regulations against currency manipulation, they do it anyway which gives them up to a 40% advantage cost of goods.
- 2. Counterfeiting – China has been confirmed as the “world’s leading counterfeit superpower” by the U.N. office of drugs and crime.
- 3. State Owned Enterprises (SOE’s) – These are companies owned by the government and they control approximately 50% of China’s industrial assets.
For instance Changchun Company a rail car maker was lowest bidder on a Massachusetts Railroad and Transit system funded by Massachusetts tax payer dollars.
Besides railroads the Chinese have targeted the U.S. wind tower, solar panel, steel, glass, and shipbuilding markets.
Another example is China’s predatory pricing and subsidies to capture the U.S. Wind tower market. American Wind Tower manufacturers list 40 subsidy program from cash grants and subsidized steel to tax breaks
- 4. Tariffs – China arbitrarily imposes tariffs on imported products.
The Chinese Commerce Minister said it was a legal tariff and if “The U.S. thinks otherwise they should sue.”
- 5. Cyberattacks – Cyber spying by China is now a common occurrence and known by the public. This is mostly aimed at stealing intellectual property, but some cyberattacks are security issues, such as the ability to shut down the U.S. Power Grids.
- 6. Anti-Monopoly laws – In 2014 China investigated dozens of electronics, ball bearing, autos, and LCD screen companies and charged the companies for charging excessive prices, abusing market position, and creating vertical monopolies.
- 7. Purging foreign technologies – China has a plan to purge using foreign products and suppliers. They are replacing Microsoft Windows with their own homegrown system called NeoKylin.
The plan affects 4 segments of their economy and is driven by national security concerns.
- 8. China Compulsory Certificates (CCC) – China requires manufacturers of high tech products to get a CCC license before the goods can enter the country.
This is just another way for China to evaluate technologies.
- 9. Encryption codes – Any high tech company who wants to sell to the government must provide them encryption codes.
In addition, if the Chinese know the encryption codes and the product is sold in other countries, the Chinese can use it to hack into the company’s computer like they did against Google in 2009.
- 10. Joint Ventures – In many industries like China’s automobile industry, a foreign company is only allowed to build a manufacturing plant if it is a joint venture and the maximum ownership of the foreign country is 50%.
- 11. Litigation – Counterfeiting is a huge business in China from Nike sneakers to concrete block machines.
But cities and towns depend on counterfeiting to provide thousands of jobs and these city governments protect the counterfeiters.
So the chance of shutting the counterfeiter down is very small.
- 12. R & D and Patents – In 2010 China announced that any foreign company that wants to sell to the Chinese government must agree to move their research and development and patents to China.
- 13. In 2011 the House introduce H.R. 2378: Currency Reform Act.
It is obvious that the Chinese do not agree or intend to comply with any WTO rules that get in the way of their own strategic goals.
Their primary strategy appears to be predatory mercantilism where they do anything within their power to decrease imports and increase their exports.
They have successfully created their own trade rules and ignore the U.S. and the WTO because they know that neither Republican nor Democratic administrations will do anything about it.
Robert Scott of the Economic Trade Institute has made it abundantly clear that the trade deficit is destroying American jobs.
In his report he shows these losses by state. The obvious conclusion is that if we can’t find a way to reduce the trade deficit we will continue to lose jobs into the future. Perhaps the government is afraid of taking action against the Chinese for fear of “losing the Chinese loans that help finance our budget deficits.”
In 2001 we ran a deficit with China of $84 billion per year, and by 2013 the deficit was $318 billion. At an average of 20% growth per year the deficit should swell to more than $1 trillion by 2021.
This is simply not a sustainable game we can count on.
We are like the blind man walking towards the cliff who won’t know where the cliff ends until he is in free fall. I do not think there is much chance of convincing China to quit manipulating its currency or to change any of the unfair policies and tactics listed above.
However a good first step would be for the Republican controlled Congress to help end currency manipulation by passing (H.R. 1276 and S. 1114) that would allow the Commerce Department to treat currency manipulation as a subsidy in countervailing duty trade cases. In addition, the president and federal agencies possess the tools needed to end currency manipulation with the stroke of a pen.
The Treasury and Federal Reserve have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention (Bergsten and Gagnon 2012).
This means that the U, S, government could refuse to let currency manipulators like China continue to buy our treasury notes.
A recent report from EPI shows that full revaluation of the yuan and other undervalued Asian currencies would reduce the U.S. trade deficit by between $200 billion and $500 billion within three years, thereby increasing U.S. GDP by as much as $720 billion, adding up to 5.8 million U.S. jobs, and reducing the federal budget deficit by up to $266 billion per year and increasing net state and local fiscal resources by up to $101 billion per year (Scott 2014a).
It is very doubtful that the Republicans will pass the (H.R. 1276) currency manipulation bill or that the Treasury Department will stop foreign purchases of our assets.
The only other option is to put a value added tax on imports of countries that manipulate their currencies.
So who is benefitting from carrying these enormous trade deficits?
The winners are the multi-national corporations who not only get the benefit of our government financing the trade deficit but they also benefit from all of the same subsidies that China has.
I might add that the multi-nationals are also the biggest lobbying entities and donors to both Republican and Democratic campaigns
Unfair and illegal trade is slowly eroding our manufacturing base and hollowing out the middle class. In his December 2014 Report, Scott makes the case that the decline in wages and living standards (especially the 100 million workers with a high school education) are also a result of the growing trade deficit.
We are in danger of becoming a nation of service industries looking for someone to invoice. America is in a dangerous financial position with the Chinese and our government’s policy of appeasement is simply not working. We owe China an enormous amount of money, and continue to accumulate a huge trade deficit in a trading game that we can’t possibly win.
This is a house of cards that could collapse and the longer we do nothing about it the harder will be the fall. If the government did attempt to implement any of the three suggestions in this article there will be screams of protectionism and that we could cause a trade war. But the fact is, we are already in a trade war and we are losing decisively.
It is time to stand up to China.