Is the U.S.-China Economic Relationship About to Permanently Shrink?

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Derek Scissors of the American Enterprise Institute makes the interesting case that after twenty-five years of enormous expansion, both the United States and China will soon reach the conclusion that the relationship involves two incompatible forces.

Indeed, Scissors argues that in the current trade dispute, both sides are close to the realization that whatever the deal, no agreement will last. The Trump Administration is a "difficult negotiating partner because it is divided on China goals." The Chinese were incorrectly led to believe that the U.S. trade hard-liners "would be pacified by a few headline deals."

Meanwhile, the Chinese currency since May has plummeted 8 percent against the dollar. The U.S. Foreign Investment Risk Review Modernization Act was just enacted. Since 2016, Chinese investment in the United States has plummeted.

Then there's Chinese President Xi Jinping who, Scissors argues, "has cultivated the image of another Mao rather than another Deng." Translation: A strong-man autocrat who is not a believer in liberalized markets.

Is Scissors correct that the U.S.-China relationship is about to permanently shrink? And if so, how will this change affect the global order, including currency relationships, relative levels of economic performance, and national security concerns?

Twenty distinguished global strategists consider the question.

PETER NAVARRO Deputy Assistant to the President and Director of Trade and Manufacturing Policy, The White House

Is the U.S.-China trade relationship "going to shrink," as the American Enterprise Institute's Derek Scissors argues? The answer depends on China's willingness to embrace the market-oriented reforms that it promised to undertake when it joined the World Trade Organization and fully commit more broadly to the principles--and practice--of free, fair, and reciprocal trade.

There can be no half measures here as the stakes are simply too high for America's future. President Donald J. Trump has made it clear he will no longer tolerate China's unfair trade practices, first and foremost its attempts to acquire America's technological crown jewels.

President Trump's 2017 National Security Strategy identified China for the first time as a strategic competitor, and the list of U.S. grievances in the technology space have been extensively documented in the landmark March 22, 2018, Section 301 investigation report published by the United States Trade Representative. Based on this and other public and government information, China's tactics to gain control of U.S. technology include forced transfer, state-directed and state-funded investment in cutting-edge U.S. tech companies, and the cyber-enabled and direct theft of intellectual property, trade secrets, and confidential business information.

In June 2018, the White House Office of Trade and Manufacturing Policy that I direct published a report entitled, "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World." This report assessed that China uses more than fifty unfair acts, policies, and practices that range from high tariff rates and non-tariff barriers to transshipment to evade United States antidumping duties. The bulk of these acts, policies, and practices are outside the norms of free and fair trade and disrupt not just the United States, but also the global economy.

The picture that emerges from the USTR's and the OTMP's analyses is that of a Chinese model that, by construction, derives much of its economic growth at the expense of other nations. The key question, of course, is to what extent China will be willing to give up its unfair trade practices in any "deal" in exchange for continued access to U.S. markets. In OTMP's assessment, a core problem is that even if China ceases engaging in many of the ways that it extracts jobs, technology, and wealth from the United States, there are still many more tools of economic aggression our businesses, workers, farmers, ranchers, and entrepreneurs would have to contend with.

This need not be a stalemate, the pessimism of Scissors notwithstanding, if China take serious steps to address its unfair trade practices. However, the Chinese side continues to deny that it engages in practices such as cyber intrusions and forced technology transfer--despite abundant evidence to the contrary.

At the end of the day, the question is this: Will China be willing to join the ranks of nations that embrace fair and reciprocal trade and live up to the commitments it made to the United States and the rest of the world when it joined the WTO? Under President Trump's leadership, the United States is finally calling China to task, and other countries should do the same. Do not be fooled by China's claims that it is the biggest defender of the multilateral trading system.

The American public and business community fully understand the challenge facing America's long-term competitiveness. After decades of taking advantage of the United States, there is now widespread public understanding that America is being cheated. There is also broad bipartisan support, as well as increasing cooperation amongst U.S. allies such as Japan and Europe, for standing up to China's behavior, particularly on issues related to technological transfer and state-owned enterprise behavior.

President Trump will do what must be done to defend this country. China must address these fundamental market barriers if it wants to continue to expand its economic relationship with us.

GARY CLYDE HUFBAUER

Nonresident Senior Fellow, Peterson Institute tor International Economics

Derek Scissors, part-time advisor to the Trump Administration, is known for prolonged animosity to China. His prediction that the U.S.-China relationship will permanently shrink is partly wish-fulfillment and partly forecast that Trump will be re-elected in 2020. Scissors may prove right, and if so that will prove two things: that the White House can turn a major country from adversary into enemy with truculent tariffs and Cold War rhetoric, and that Trump has more staying power than his many scandals might suggest. Given this prospect, the real question is whether America will gain or lose from shrinking economic ties to China.

My bet is that the United States will suffer as much as China. Two-way trade, while orders of magnitude larger than my tribe of Treasury mavens foresaw in the 1970s, still falls well short of its potential magnitude given the economic size of the United States and China. Expanding trade delivers huge supply-side benefits to both parties, through the workings of comparative advantage, economies of scale, the narrowing of mark-up margins, and faster adoption of best practices by laggard firms. Weak U.S. productivity growth, well under 1 percent a year, suggests that the United States needs these tonics more than China. If Alibaba is foreclosed from the U.S. market, who will compete with Amazon?

Two-way direct investment is surprisingly modest and the recently enacted FIRRMA bill, alongside Chinese investment restrictions, will ensure it stays that way. Research by Theodore H. Moran and Lindsay Oldenski shows that Chinese firms operating in the United States pay better wages and conduct more investment and research and development than average American counterparts. As China rapidly evolves from technology imitator to technology innovator, the United States will forego spillover benefits that could flow from the local presence of top-flight Chinese firms. Only a supreme nationalist could believe that U.S. firms will remain best-in-class in every dimension of technology over the next two decades. Yes, in many, but not in all.

Skilled immigration could be another casualty of the Scissors vision. U.S. college applications show the wealth of Chinese talent. If economic ties shrink, student visas may well be tightened, just like H1 -B visas, depriving the United States of highly promising scientists, engineers, and entrepreneurs.

Only Peter Navarro's acolytes will celebrate shrinking U.S.-China economic ties--if that's what the future holds. Other Americans should lament the multiple losses that could have become our economic gains.

JASON FURMAN

Professor of the Practice of Economic Policy, Harvard University's Kennedy School, Nonresident Senior Fellow, Peterson Institute for International Economics, and former Chairman, President's Council of Economic Advisers

The United States is clearly better off with an economic relationship with China than it would be without. Whatever problems the relationship has, losing access to an export market with 1.4 billion people would be a big loss for our economy and losing access to key intermediate inputs and final goods imports would be even worse. China is also better off with an economic relationship with the United States than it would be without, for much the same reason.

The mutual benefits from the economic relationship mean that there should be some bargaining equilibrium that is better for both countries than defecting. There is a strong case to be made that there is a bargaining equilibrium that would leave both countries better off than they are today. The United States wants China to hew more closely to international rules and norms on equal treatment of foreign investment, an end to forced technology transfer, stronger intellectual property rules, a reduction state subsidies, and the like. These may be exactly the steps China needs to take for its own domestic economic reasons.

Foreign companies are getting increasingly sick of uncertainty in China and are instead investing elsewhere--and when they invest in China they only bring and transfer the inferior technology. As China depends more on the accumulations of ideas instead of just raw capital, intellectual property rules will become increasingly important. Subsidies are increasing debt, especially for provincial governments, and distorting the economy...

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