Posted by: Bixmoor

Update on the China-US relationship

Increasingly, China is being reprimanded by the United States for bad behavior. There is a clear trend. It is difficult to decide whether this is due to Beijing’s actions deteriorating or less willingness in Washington to tolerate them. The grounds given are clear and consistent.

Former US Ambassador to the UN Nikki Haley recently noted how far the US had come in just under two years. How the US had not been respected in 25 years but was respected now. Everyone may not love America, but they increasingly respect it. In fact, there is some similarity with the victorious George W Bush campaign which felt that the US presidency had lost respect at home and abroad in the Clinton years.

The differences are that Donald Trump does not feel that wars are the way to win respect and second, he doesn’t think that any president has been respected in a quarter of a century. Showing firmness in the face of China’s aggressiveness is part of the Trump administration’s policy of rebuilding respect for the US.

One of the historic differences is that previous US administrations took a “silo approach” and addressed trade issues, for example, in a vacuum, separately from military or human rights issues. President Trump declines to think like that. He looks at the relationship with China as unitary. If China behaves badly in one area, he is quite prepared to respond in a different area. This is a wholly novel approach. It gives him a wider range of policy options.

US Vice President Mike Pence made a series of criticisms of China recently ranging from gross human rights violations in Xinjiang, through closing of Christian churches to interfering in US democracy. The policies of subsidies, tariffs, quotas, forced IP transfer, and IP theft have built China at the cost of other countries.

His criticism comes down to three core points. They treat their people atrociously, they trade unfairly and they interfere in US politics. Pence said that the US desires “a relationship grounded in fairness, reciprocity, and respect for sovereignty, and we have taken strong and swift action to achieve that goal”.

US officials have grumbled for several years about Chinese technology companies presenting a security risk, Huawei in particular. Earlier this year President Trump closed down ZTE and only later let it continue on draconian terms. The president said this was a favor to President Xi.

The explosive Bloomberg report released on 4th October alleges in considerable detail what the US authorities have learned regarding Chinese military interference with motherboard manufacturing in China for US companies and -ultimately – the US military. Publication of the report caused a collapse in the share prices of Chinese tech companies such as Lenovo, which lost well over a billion dollars in value.

In September the Pentagon published an extensive report on the current decay and potential strengthening of the defense industrial base. Too many of the critical materials required are being sourced from countries which might decide to terminate supply. The report’s key finding is that “China represents a significant and growing risk to the supply of materials and technologies deemed strategic and critical to US national security”. There then follows a list of measures which should be taken.

Pentagon planners will doubtless recall the use China made in 2010 of its commanding position in the supply of rare earths to restrict supplies to Japan during a period in which China was confronting Japan over the Senkaku Islands. Plans were formed under then President Obama to address this US vulnerability, but little happened. The Trump administration has seen the problem and is planning to act.

China’s zeal for nurturing state-owned industrial champions is irksome for the global and domestic private sector in limiting the free market and creating barriers to entry. Coupled with the major drive now being made to implant party committees in private and foreign companies, the Party’s plans worry businessmen.

In September, Zhou Xiaochuan, previous central bank chief, argued that large SOEs should be treated as private companies simply because they were listed. We need to note the tight control in China of everyone and the demand for all entities to have Party committees. This suggests that the current Western position that China is not a market economy and that SOEs are a distortion of a market economy is not the real debate.

The real point is that there is no genuine private sector in China. Any entrepreneur who struggles and gains success will be beholden at all times to party orders and pressure to conduct ‘national service’. There is no area where an entrepreneur can say no to the party. State control is pervasive and paramount.

The recent row at the G20 underlines this. The B20 business advisory panel has said that the distortions created by major state participation in the economy need to be addressed. The draft communique, under Argentine leadership this year, in the section entitled Eliminating State-Related Competitive Distortions, says G20 leaders should agree to “significant limitation and/ or elimination of policies that accord preferential treatment to SOEs “.

Chinese ‘business’ representatives are arguing that this advice should not be given to the G20 political leaders.

The Trump administration insisted on a clause in the recent USMC agreement making trade deals with non-market economies unlikely. China has called on Canada to ignore the ban. Beijing’s request was based, ironically, on ‘free trade’ grounds.

China’s foreign activity has attracted similar sharp criticism. Taiwan President Tsai Ing-wen said recently “the international community is concerned about China’s attempts to challenge the regional status quo…I am calling on the authorities in Beijing, as a responsible major power, to play a positive role in the region and the world, instead of being a source of conflict.” Christopher Wray, FBI director, testified to the US Senate recently that China “represents the broadest, most complicated, most long-term counter-intelligence threat we face”.

The US Congressional Commission on China recently insisted that the administration should insist on rule of law and human rights in China. The government should press for universal standards and greater reciprocity.

Chris Smith, the co-chairman, noted the considerable willingness of Beijing to improve relations but said “when you so grossly mistreat your own people and your own citizens, we care about them first…..Get the human rights part right, and the friendship and the dialogue will accelerate”.

David Shambaugh, the prominent American academic, recently said that “the areas of competition now far outweigh the areas of cooperation. You are going to see a much more assertive America vis-à-vis China.”

The US China Review Commission and individual Congressmen are proposing that the administration should review whether the weakening of Hong Kong’s freedoms and the presumed limitation of autonomy by China should warrant the US dropping Hong Kong’s privileged economic and trade status. Malcolm Rifkind, a former UK Foreign Secretary, has also said that the UK, the US, Japan and the Europeans may need to review this status.

One Chinese official last year said the Sino-British joint declaration of 1984 didn’t have “any binding power on how China administers Hong Kong”. This called into question Beijing’s commitment to the one country-two systems concept and the associated commitment to Hong Kong enjoying a high degree of autonomy. By extension there was a wider concern that China may not feel bound by binding international treaties.

A recent global poll from the Pew Centre showed that the world overwhelmingly (63:19 per cent) prefers the US as the global leader rather than China. Interestingly the margin is even higher in Asia (73:12 per cent). A director of the polling center said “in terms of Chinese soft power, what really hurts them is the perception that they don’t protect the civil liberties of their own people.”

A South Korean poll this month showed that China had overtaken North Korea as the country seen as most threatening to peace on the Korean peninsula. This is presumably based on the view that President Xi is seeking to influence Kim Jong-un in the talks with the United States.

President Trump is openly critical of many areas of current Chinese behavior and willing to punish it. Beijing is in danger of being widely seen as a problem not a solution.

This is one of the reasons why there has been clear domestic criticism this year of Xi Jinping’s foreign policy as needlessly aggressive and dangerous to China’s domestic interests.

Bixmoor is a primary bespoke research provider to business, governments and the financial community.