President Trump is furious about the US trade deficit with China, which totaled $310 billion in 2016. He wants that to be far smaller, as anybody who listened to his China-bashing during last year’s presidential campaign surely knows.
The trade deficit, however, isn’t the real problem, and the cheap Chinese imports flowing into the United States from China for the last several decades have actually helped many American families get by. A far bigger problem is the web of rules and restrictions China places on US and other foreign companies that want to do business there, as well as outright violations of many free-trade standards. “I don’t mind us having a trade deficit with China if they’re not cheating,” says economist Derek Scissors of the American Enterprise Institute. “The problem is the part that shouldn’t be there because the Chinese cheat.”
Trump has an opportunity to reset the US trade relationship with China as he embarks on a much-hyped summit meeting with Chinese president Xi Jinping this week. Up till now, Trump has mostly railed about low-cost Chinese manufacturing that undercuts US producers and kills American jobs. But there’s nothing illegal or objectionable about one country making stuff more cheaply than another—as long as it plays by the rules, more or less. That has happened for centuries and helped poor countries catch up with rich ones, while also forcing rich nations to innovate and find new ways to get ahead.
[Related: Trump has a weak hand in his summit with President Xi]
Stealing American trade secrets
There are big problems, however, with many of the “non-tariff barriers” China uses to protect home-grown firms from foreign competition. Since China belongs to the World Trade Organization, there are limits on the tariffs it can impose to raise the cost of imports and protect domestic producers. So China resorts to a wide range of other measures that have bedeviled the biggest American companies since China began to liberalize its economy in the 1980s under Deng Xiaoping.
Dozens of big US companies, including US Steel (X), DuPont (DD), General Motors (GM) and Cargill, have claimed that Chinese operatives have stolen their trade secrets, with the Justice Department prosecuting a number of Chinese nationals operating in the US for such theft. Chinese counterfeits of everything ranging from Levi’s jeans to Microsoft (MSFT) operating systems represent another huge theft of intellectual property. A 2013 report estimated that foreign countries steal $300 billion worth of American intellectual property each year, with China accounting for 50% to 80% of that total. The former director of the National Security Agency called such theft “the greatest transfer of wealth in history.”
Companies seeking to operate in China face additional problems. Last year, for instance, Apple (AAPL) lost a lawsuit against a small Chinese manufacturer that had been using the “iPhone” brand on mobile accessories such as cellphone cases, even though it has no official connection with Apple. In a Beijing court, Apple insisted the small firm was trying to profit from what may be Apple’s most famous product. But the judge ruled that Apple hadn’t demonstrated that the iPhone brand was sufficiently well-known when the Chinese firm started using the name in 2007—which happened to be the same year Apple introduced the iPhone.
In the 10 months since that ruling, Apple has announced more than $1.5 billion in new investment in China, which some analysts view as a kind of pay-to-play arrangement, given that Chinese courts declined to enforce the kind of trademark laws that are routine in most developed countries. Lo and behold, Apple just won a separate lawsuit against a Chinese cellphone maker that claimed Apple copied some of its design features for the iPhone 6. While no tit-for-tat can be proven, such seemingly capricious legal outcomes fuel suspicions that the Chinese government uses the courts as a punitive trade tool, when convenient.
The US government has been pressuring China for years on a long list of trade grievances, so to some extent, Trump can simply pick up on work done by the Obama administration if he wants to pressure Xi on opening up the Chinese economy more. The Obama administration’s 2016 report on foreign trade barriers included 15 pages of small-type print detailing the many ways China manipulates its economy to give home-grown firms an advantage, while keeping US firms out or throwing up so many roadblocks that they can barely operate.
Hampering foreign firms that operate in China
Among the tactics: giving regulatory preference to US firms that share their technology with Chinese counterparts; establishing China-only technical standards foreign firms must comply with, even when there are longstanding international standards; imposing onerous licensing requirements on certain products and services, citing “national security” as reason for restricting the activities of foreign firms, and issuing arbitrary regulations that seem to target foreign operations more than domestic ones.
These practices are in addition to the subsidized overproduction of commodities such as steel and aluminum, which western nations have long accused China of “dumping” onto global markets at artificially low prices, to seize market share and drive foreign competitors out of business. The Obama administration filed 16 formal complaints with the WTO against China for violating WTO rules, and so far has won all 6 cases for which the WTO has issued a ruling. The catch, however, is that it can be hard to enforce WTO outcomes, and the penalties may not be severe enough to deter China from further violations.
Chinese officials, for their part, argue that many nations have broken a few rules on their way to economic maturity, including the United States back in the 1800s. And some trade experts defend China, to a certain extent, by pointing out that it has only been practicing modern capitalism for a couple of decades and has come a long way in that time.
Yet China increasingly insists that its time to join the great powers has arrived, which Trump, if clever, could turn back on President Xi by insisting his nation behave like an upholder of the rules instead of a flouter of them. The conversation between the two leaders may not get that far, since it’s their first meeting. But there will be more meetings, and it could be an opportune time for Trump to ask China to change—if he knows what to ask for.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman