A Sino-US trade war may be upon us – and China may have the upper hand

South China Morning Post
William Marshall says while the Trump administration’s aggressive moves against China are making the headlines, it may be the longer-term Chinese plan to build up its intellectual property heft that will have a greater impact. 

Since the election of US President Donald Trump, storm clouds have been looming over trade relations between the United States and China. Over the past seven months, the US has sanctioned Chinese entities that allegedly trade with North Korea, kicked off an investigation into China’s trade practices with respect to intellectual property protection, initiated an anti-dumping investigation against aluminium sheet from China, submitted a strongly worded argument to the World Trade Organisation against China being granted market-economy status and, just last week, a Treasury Department official told the Financial Times that the Comprehensive Economic Dialogue between the US and China had been put on hold.

As rhetoric gives way to aggressive US action, a long-feared trade war may indeed be upon us.

While the aggression and bombast of the early rounds certainly go to the Trump administration, a coherent long-term strategy seems to be lacking. With the suspension of the Comprehensive Economic Dialogue, the Trump administration has abandoned what has been arguably the most effective trade negotiation tool employed by previous US administrations with China.

When dealing with the world’s largest economy, engagement rather than estrangement is always more likely to get results. While it may seem that President Xi Jinping and his government in Beijing are laying down passively, they are not. The late-mover advantage and the economic upper hand may ultimately be China’s, although Trump’s approach seems more optimised for headlines.

The deficit in US goods trade with China has long been a pressure point with succeeding US administrations. In recent years, that deficit has grown to unprecedented levels. In the most recent statistics from the US Census Bureau, the trade imbalance in goods imported from China versus goods exported to China has grown by more than 33 per cent in the year to date through October this year, compared with the same period last year. For a president who was elected in part on his tough talk surrounding US trade relations with China, this is not a headline number Trump will be re-tweeting.

For its part, China is concerned about America’s willingness to recognise China as a market economy, the restrictive application of US export control laws against China and the protection of Chinese enterprises investing in the US.

In a policy paper unveiled this year, the Ministry of Commerce recognised the concerns the US has regarding the trade deficit, the exchange rate of the renminbi, overcapacity, market access and intellectual property protection. However, in what could be read as a subtle reminder to remain engaged, it went on to point out that China is the biggest market for US exports outside North America. Over the past 10 years, it said, the average growth rate of US exports to China was nearly three times that of US exports overall and around twice the growth rate of China’s exports to the US. Thus far, such reminders have not had their intended effect.

Trade relations with China have been high on the US presidential agenda for decades. The Strategic and Economic Dialogue with China was initiated in 2009 during the Obama years to help US business gain greater access to China’s domestic market. Several quiet victories were scored as part of these talks.

In an apparent attempt to pick up the mantle, the Trump administration initiated the Comprehensive Economic Dialogue in April this year, following Xi’s visit to the US. This latest attempt at dialogue with China, perhaps characterised by a more hawkish US approach, has failed to even establish an agreed agenda between the parties from which a dialogue could begin. The talks’ suspension confirmed that the fears of each side have come to pass. Trade relations between the world’s two largest economies may be at a new low point.

Two areas at play may have a profound impact on China’s trade relations into the future. The first issue is the current argument at the WTO over China’s status as a non-market economy. While this may sound like an esoteric issue, it has a profound effect on Chinese companies’ ability to defend themselves in anti-dumping cases initiated by the US and the European Union. By virtue of its status as a non-market economy, the actual costs and domestic sales information of Chinese exporters are disregarded in favour of selectively chosen third-country data used as a surrogate. As one can imagine, this has a major impact on the ultimate anti-dumping duties imposed on Chinese exporters.

China has argued that its WTO ascension agreement provides for its treatment as a market economy 15 years after it joined the WTO. A WTO dispute settlement panel in a previous case concurred with China’s interpretation of this provision, although that case involved other questions of WTO law and was not determinative on this issue. The current case initiated by China specifically addresses this non-market economy status.

The second issue relates to intellectual property – not specifically China’s practices as to the protection of intellectual property, which are currently under investigation by the US, but in relation to export control regulations that are based in part on the origin of the technology content of exported goods.

The US has long had an export control regime that regulates trade worldwide in goods of US origin and goods with US content, which includes US-developed technology. China has now drafted its own export control regime which incorporates similar provisions, and which may enable China to exercise worldwide control over trade in goods incorporating Chinese technology.

In its May policy paper, the Ministry of Commerce notes that China is responsible for 25 per cent of global manufacturing output and, anecdotally, more than 700 suppliers of Apple’s iPhone in the Shenzhen area alone. Should China decide to exercise export control over content of Chinese origin, such manufacturing intellectual property could well provide China with significant leverage.

It is important to note that China is the largest trading partner of the US and the US is China’s second-largest trading partner. Their relationship is therefore a high-stakes global issue. Under Trump, the US has taken aggressive action to try and enforce what, in its view, should be a more level playing field with China. China, for its part, appears to be implementing a longer-term strategy that recognises its competitive advantage in manufacturing, while building towards controlling the real value in the modern supply chain – the intellectual property. Meanwhile, companies and consumers get caught in between. As with real war, no one wins a trade war.