Why Trying to Hurt China in the Trade Game Could Backfire

What’s good for the goose is often good for the gander in the world’s intertwined economies

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Kyodo / AP

U.S. trade representative Michael Froman shakes hands with Chinese Vice Premier Wang Yang while U.S. Secretary of Commerce Penny Pritzker shakes hands with Chinese Agriculture Minister Han Changfu at a meeting in Beijing on Dec. 20, 2013

Michael Froman, the U.S. trade representative, is in the midst of negotiating two of the largest trade bills ever envisioned. The Atlantic and Pacific pacts, once completed, could encompass more than 60% of the world’s economy, including most of Europe and Asia. The dirty little secret about the treaties: they both exclude the world’s largest and fastest-growing economy: China.

“While I don’t think you’ve ever heard the President say it publicly, it’s a containment policy for China,” says Michael Wessel, a commissioner on the U.S.-China Economic and Security Review Commission. “Clearly, behind closed doors, that’s the way it’s promoted. The goal is to strengthen U.S. economic ties, have the enhanced reliance on the U.S. market rather than on China’s market and also upgrade rules so that China is more of an outlier.”

But what’s good for the goose is often good for the gander in the world’s intertwined economies. In codifying its policies on things like state-owned enterprises, rules of origin and currency manipulation in the Pacific trade deal, the U.S. could actually end up helping China.

(MORE: When Exactly Will China Rule the Economic World?)

One of the biggest hang-ups on the trade deals is currency manipulation. Legislation introduced last week to fast-track the trade deals noticeably lacked the support of the top Democrat on the House Ways and Means Committee, Sandy Levin. The Michigan Representative has said for months that the Pacific agreement must include tough anti-currency-manipulation language, which the current version apparently lacks. The “legislation needs to address currency manipulation not only through a ‘negotiating objective,’ but also through legislation that provides direct relief to U.S. industries materially injured by imports,” Levin wrote last week in announcing his opposition to the bill. Levin’s biggest beef is with China’s currency devaluation, which he says has cost U.S. businesses $125 billion in net exports. Whatever guidelines are adopted in the Pacific bill will form the foundation of the bilateral trade agreement being negotiated between the U.S. and China. “Once we set rules in these areas, China can presume that’s the approach taken with them,” Wessel says.

The U.S. has also been working with Vietnam and Malaysia on how to deal with state-owned enterprises. Vietnam, still run by the Communist Party, has many such enterprises, and opening them up to foreign competition is a subject of some delicacy. Malaysia isn’t communist but it has been ruled by one party for decades and has over 2,000 state-owned enterprises. China, of course, is the gorilla in the arena of state-owned enterprises, and is watching closely to see how the U.S. treats Vietnam and Malaysia. The U.S. has been eager to give big Chinese companies more opportunities to invest in the U.S, like the $4.7 billion Smithfield Foods acquisition last year, Sinopec’s $2.1 billion investment in shale drilling across the West, Tianjin’s $1 billion facility being built in Texas and numerous chemical-company investments. But some observers have complained the U.S. hasn’t been hard enough on state companies when it comes to ensuring separation from government objectives and politics, all but giving China a pass when it comes time to negotiate with them.

Finally, China will benefit directly from the Pacific deal itself given the weak rules-of-origin clauses, according to a leaked version of the negotiating text posted on WikiLeaks in November. Though Froman is quick to note that none of these provisions is set in stone yet — negotiators are hoping to nail down a deal before President Barack Obama’s visit to Asia in April — if the draft version stands, a car built in Malaysia with 65% parts made in China could still be considered Malaysian. Given the vast amount of manufactured goods and parts China supplies virtually all 12 of the Pacific countries negotiating the free-trade deal, it will almost assuredly benefit from increased sales if and when the pact is ratified.

So, for all the intent to exclude China and demonstrate American free-market hegemony, China is already clearly too big to work around. Ignoring King Kong isn’t going to make him go away. Worse, it might make him angry.

MORE: Why China Can’t Create Anything

32 comments
RobertNguyen
RobertNguyen

The main argument of the article is stupid and has no basis, It must have been written as a hidden ad for the Chinese interests...


khi.mah.uk
khi.mah.uk

The simple fix for making Chinese products more expensive is not to ask them for loans. Without loaned Yuan’s the currency would appreciate making the products more expensive and fixing the trade imbalance!

Tiger-Pi
Tiger-Pi

Only a few of your readers seem to actually know anything about the Peoples Republic of China as is evident from misinformed comments and very shallow knowledge of history,economics or geogrpahy. China is now an economic giant and owns most of the money and bonds printed by US of A. Its huge population is a vast market for goods and services. The Obama adminsitrtion and its pesent set of officials have shown little tact in dealing with the Asian giants like India or China. The US Trade Rep and its Commerce departments have not been successful in laying out a level playing field for international trade and gets into constant disputes with most countries on various trade issues as they dance to the tunes of various lobbies in the US. So trying to contain China through trade issues is not going to pay any dividends. China now feels it is strong enough to browbeat another Asian economic power,Japan. The people of US have been getting 'cheap' Chinese products while openly  their reps go around criticizing Chinese trade methods and 'manipulations' of the currency. Some readers even hint of  trade disparities with China leading to wars and that the US being a 'stronger' economy would win it. The US has just come through a devastating economic slump and lived through most of it because they could buy things at much lower cost from countries like India,China, Bangladesh,Vietnam,Malaysia.....Constant support to overseas wars have sadly  depleted the US treasury. What we need is  international cooperation on trade  and commercial issues. Leaving China out out is a costly mistake being made by shortsighted US bureacrats for short term gain. 

roknsteve
roknsteve

China will be "Out of Business" by 2020 because they will be buried in trash and pollution and no fresh water.  All the bees are dead in China.   Next millions of people will start dying.  

JenLi
JenLi

US risks its tattered credibility coming out of the Iraqi war by sending a message of peace to the Chinese, then tries to "contain" its peaceful rise.    Actually this containment policy seems like Japan channeling through the US congress with her standard hypocrisy.

renfieldc
renfieldc

Reading many of the comments, it's obvious anti-China sentiment among the many ignoramuses in the USA is very much alive. Get real; China is The Future. Take a trip and see for yourselves.

thereo
thereo

I was hoping to see comments like Boycott Walmart, Target and cheap product China. 


In fact, I found well thought-out comment from both sides. The only comment I found quite puzzling and want to shine the lights on that peanut brain is @ReneDemonteverde when he said "reliable ally Taiwan". Oh...the irony. 


What else? I want to read something like valued ally Japan, S.Korea and such. Really love those guys and their comments. 

JNSmall
JNSmall moderator

I should write about trade more often. Some thoughtful comments here!

JNS

DenisWinkle
DenisWinkle

Where did TPP come from????

In January 2008 the United States agreed to enter into talks with the P4 members regarding liberalization of trade in financial services. Then, on 22 September 2008, US Trade Representative Susan C. Schwab announced that the United States would begin negotiations with the P4 countries to join the TPP, with the first round of talks in early 2009.

15th United States Trade Representative

In office
June 8, 2006 – January 20, 2009

President George W. Bush

Preceded by Rob Portman

Succeeded by Ron Kirk

Personal details

Born March 23, 1955 (age 58)

United States

Political party Republican

She helped to launch negotiations for ACTA. "Proposed US ACTA plurilateral intellectual property trade agreement (2007)" Retrieved 1-19-10 from Google cache.

ACTA establishes the ACTA committee in Article 36 as its “own governing body” outside existing international institutions such as the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO) or the United Nations. 

http://www.techdirt.com/articles/20120508/17174518835/time-to-realize-that-obama-administration-doesnt-even-have-authority-to-commit-us-to-acta-tpp.shtml

As it all started with NAFTA. Then turned over too a “non-government” private enterprise called APEC.

The Asia-Pacific Economic Cooperation (APEC) forum was established in 1989.

The APEC Business Advisory Council (ABAC), established in 1995, represents the interests of business in APEC in taking preference over and regulating “The Rue of Law” worldwide.

APEC currently has 21 members, including most “countries” with a coastline on the Pacific Ocean. However, the criterion for membership is that the member is a separate economy, rather than a “state”.

As a result, APEC uses the term member economies rather than member countries to refer to its members. Each economy nominates up to three members from the private sector to ABAC.

APEC has been “criticized” for promoting free trade agreements that would trammel national and local laws, which regulate and ensure labor rights, environmental protection and safe and affordable access to medicine.

Trammel means: something that limits a person's freedom and wellbeing.

As we witness national protests through out the world today.

DiDiWu
DiDiWu

US kept complaining about unfair trade but would you want to set up sweat shops making cheat clothing in USA? You do buy cheap clothing, right? And you are typing your comment on a not-too-cheap keyboard made in China, right? Care to make these products with American labors?

ReneDemonteverde
ReneDemonteverde

Trying to hurt China in trade talks could backfire. So why not just say yes to all China`s demands ? Seems like this country behaves more like a loser once Obama came to office. Iran demanded nuclear talks because it felt the adverse effect the economic sanctions on them. So what do we do ? We loosen them to their advantage. Once the money was released it starts behaving like the winner while this country starts behaving like the loser. We have the technological, economical and military edge over China. What we do not have is the courage and determination which China has over us. We have become a nations of ditherers, cowards and weaklings. We have already jettisoned our reliable ally Taiwan in favor of China. Now China are threatening our allies Japan and South Korea because they know under this President we are liable to do nothing. It is sending military and naval ships to Spratley islands also claimed by our allies.

StephenSwain
StephenSwain

Look:  The Chinese government has fomented, strategized and funded illegal and unfair business practices for decades.  Our leaders, both government and private sector, have taken the short view that sending jobs offshore and buying cheaper goods from China are good for our economy.  Now, finally, very belatedly, maybe they are beginning to realize just exactly how dire this mistaken notion has been.


Let's see how agile both sides can be.  Let's see if the US government can dance the global two-step.  I doubt it.  But, at least they appear to have begun to realize that in order to remain strong, we have to be a manufacturing nation, not just a consumer of subsidized good from China.

jefforsythe9
jefforsythe9

Once again countries getting into bed financially with the largest human rights offender in the history of this planet. The brutal Chinese Communist Party practices torture, slavery, organ harvesting and murder in its attempted genocide of the tens of millions of innocent Falun Gong practitioners who live in China yet Western Governments are lined up to try to make a few filthy dollars any way possible.  The U.N. even gave Red China a seat this year on its Human Rights Council. Shameful.

lpc1998
lpc1998

First and foremost, how much of the 60% is tied up with the Chinese economy? Less that and see what is left.

Excluding China in any trade arrangement could be bad idea as the China exclusion in the International Space Station is proving to be.

The US attempt at RMB manipulation is transforming the RMB into a currency for international trade and investments for China. Prior to the 2008 Global Financial Crisis, the RMB was basically a Chinese domestic currency, not even traded in the foreign exchange market, and the dollar was her currency of choice for her international trade and investments. In other words, the US attempt at RMB manipulation has seriously hurt the dollar and undermined the dollar’s status as the primarily currency for global international trade and investments.

SOEs (State-owned enterprises) are the soul of the East Asian economic “miracles”. If Vietnam and Malaysia ever effectively give up their SOEs, they will be giving up any hope of further economic development and join the rank of the sinking economies. Instead of trying to outlaw the SOEs, the US and other ailing western economies should embrace the SOEs and leverage on their strength for economic development as what the East Asian “miracle” economies have done. However, this would require a revision of some of the economic theories of western capitalism.

China is the 6th and the latest version of the East Asian economic "miracles".

SavvyInvestor
SavvyInvestor

What's the problem if the Chinese are working away producing stuff for us and periodically get little green pieces of paper with dead presidents' pictures on them to put in their drawers.  Then we get all the stuff we produce plus all the stuff they produce.  sounds like a winner to me.

ChinaLee
ChinaLee

In total, China's Yuan currency has appreciated 46% (ie. 36% from nominal currency appreciation and 10% from higher inflation) against the U.S. dollar since 2005.

The Chinese currency has appreciated by 36% against the U.S. Dollar in the last eight years from a direct currency conversion.

According to an U.S. Treasury report, annual inflation is higher in China than the United States and this has contributed another 10% effective Chinese Yuan appreciation against the U.S. Dollar since 2005.
----
Math:
In 2005, one Yuan was worth 12.09 cents. [1 dollar / 8.27 yuans = 12.09 cents per Yuan]
In 2013, one Yuan is worth 16.47 cents. [1 dollar / 6.07 yuans = 16.47 cents per Yuan]

Yuan appreciation = (16.47 cents – 12.09 cents) / 12.09 cents * 100 = 36% appreciation vs. U.S. dollar

ChinaLee
ChinaLee

Corroborating proof from Bloomberg News of China's 36% currency appreciation in nominal terms since 2005.

"Yuan at 20-Year High Signals China Paring Intervention
By Ye Xie and Fion Li | Dec 9, 2013 11:53 AM ET
...
The yuan has advanced 2.6 percent against the dollar this year, the best performing currency in Asia, extending its gain to 36 percent since 2005."
----------
Corroborating proof from U.S. Treasury on additional effective 10% appreciation of China's currency due to higher inflation in China. News report by WantChinaTimes.

"US Treasury: China does not meet currency manipulator definition
Xinhua | 2012-05-26
...
In its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, the Treasury highlighted the need for greater exchange rate flexibility, including China and some other major economies.
...
'Since China initiated currency reform in July 2005, the RMB has appreciated 40% bilaterally against the dollar after adjusting for inflation,' according to the report."

BajieZhu
BajieZhu

Talk about lead with the chin - the TPP in its current form would add, on average, about a 30% cost increase to production. If producers today cannot compete with China, try that on for size. Even if it is true that the the bloc has a big part of the world's trade, there is still the other 40%, which is basically ceded permanently to the lower cost producer.  Moreover, as the article points out, there will be plenty of relabeling and sale through 3rd parties.   Therefore the TPP can literally mean major upside for China - likely quadrupling trade to over $15 Trillion a year within a decade, with much better profits. 


Moreover, the TPP has very little to do with trade.


It is scary stuff - the TPP demands that member countries give up sovereign control over capital flow, requires "banking reforms", and backs it up with ISDS (kangaroo court arbitration taking away control and jurisdiction from sovereign courts). The combination is designed to enable maximum marauding by American banksters via derivatives fraud. Now add in the data theft backed up with cutting edge technology, done on a scale larger than that of the rest of the world combined. It is clear that the hegemon is gambling for keeps.


So how would countries defend against this commercial espionage, in the face of outright lieing that the alphabet soup agencies are Not Stealing Anymore?


It would not surprise anyone if the negotiations at the TPP and TTIP rounds would now include demands for protection against data theft, with:


1. aggrieved party only has to show prima facie case of data theft, after which the burden of proof shifts to the side benefiting, to establish that there was no data theft;


2. quintuple damages (5 times face value of contract), and 2x attorney fees recovered; not dischargeable in bankruptcy;


3. in any ISDS (arbitration), automatic forfeiture for the side that benefited from data theft; and


4. mandatory jail time for the officers of the entity benefiting from the data theft.


That ought to do it.  Without that protection, you will see the bloodsucking by American banksters to so weaken the economies of the TPPers (especially weak ones like Vietnam, the Phillipines, etc.) to the tune of trillions of dollars a year.


duduong
duduong

Before a bully goes about his business, he should first weigh the size difference against his presumed victim. 

China just surpassed the US as the world's largest trading nation; in a year or two, it will have the world's largest import as well. At a grow rate of 10-12% per year vs. the US' 2-4% , by 2020 Chinese trades will be half again as large as the US. Now, I don't know how a midget is supposed to bump a giant off the world stage, but I do know that there will be considerable risk of backfiring involved in the attempt.

lpc1998
lpc1998

@roknsteve

People do not just stand there and die. If you were correct, there will be tidal waves of Chinese emigrants out of China, both legal and illegal, soon. The US has millions of admirers in China, who prefer the American Dream. These people will discover how their holy land would welcome them.

lpc1998
lpc1998

@thereo @ReneDemonteverde

Japan, South Korea and Taiwan are the US military allies,  but de facto Chinese economic allies. They are amongst those who devastate the US industrial and manufacturing bases under the cover of Chinese trade surpluses.

es12777
es12777

@lpc1998  What you think does not make sense to me. China will pass through us in the future no matter what. If we take the pain now they will take a little longer to pass us. There is no way that we can stop China from being the biggest nation in the world. We can just slow the process by slowing them down. The less business we do with them the less growth they will have. But obviously they will surpass us some day. Here is an example. We in USA produce 100k scientists per year; they on the other hand come out every year with 1.2 million.


StephenSwain
StephenSwain

@SavvyInvestor Oh, it's a great deal except for one thing:  We buy a great, great deal more from them than they buy from us.  And the cost of this dazzling business proposition:  We exported hundred of thousands of jobs and valid, viable technologies to China.  So what are our people supposed to do now, sell informational hamburgers to each other?  Your analysis, unless you meant it ironically, makes no sense.

lpc1998
lpc1998

@ChinaLee

You have missed the point. The US would consider the RMB as undervalued as long as China has a trade surplus, especially with the US. It does not matter whether the RMB has appreciated 100%, 200%, 300% or more. That is why the US has never said by how much the RMB is undervalued.

This is similar to the US allegations of Chinese telecommunication equipment being used for espionage. The US is concerned about this equipment being use for espionage by the Chinese government because this equipment has the potential for that purpose. The US knows about this potential because she has been using the US telecommunication companies and equipment for espionage for a very long time. So it is irrelevant for Chinese telecommunication companies to prove that their equipment is currently not used for espionage by the Chinese government.

ShaunDuncan
ShaunDuncan

@lpc1998 @thereo @ReneDemonteverde Not so much... China and Japan have a fragile peace and Japan knows China is eyeing it's oil.  China violated Japanese airspace recently (the first time in a long while).  As for South Korea.... they compete, but have to play nice to a certain extent.  Taiwan's official name is the "Republic of China".  So, the political situation there is very tense.

 The stupid thing is that we continue to fund a country that released a map of how much of our country they can hit with their weapons... it's ridiculous.

lpc1998
lpc1998

@es12777 @lpc1998

The US will remain the leading nation in the world for a long time to come. In per capita terms and comprehensive national strength, China is still far behind the US with no certainty that China will ever surpass the US. The time frame is so long that the probability of something unforeseen happening during the period is high.

The greatest threat to the future of the US is not the rise of China or any other developing country, but the accelerated decline of the US caused by dysfunctional governance and society in general. So resources and efforts spent to slow down China’s development would be better spent to address the many urgent problems in the US. Moreover, China’s reaction to such US actions against her could be costly to the US too. Therefore, it is better for the US to find ways to gain from China’s development than to try to slow it down.

A stable, confident and prosperous US is very good for China, not only because the US is one of the most important trade partners of China, but also the US would be less likely to have suicidal tendencies. (Yes, in an all-out nuclear war, the US could destroy China a hundred times, what if China could destroy the US 2 times).

a09b24
a09b24

@StephenSwain @SavvyInvestor  I agree with SavvyI.  We can sit around doing nothing or entertain ourselves whatever way we like. I myself would lie on the beach, look at the sea, drink beer and check out those hot bikini bodies. All our daily necessities will be provided by those Chinese slaves in exchange for the tiny pieces of green papers which we can print as much as we like without much effort.  If people are bored, they can entertain themselves by so many things, for example doing art works, writing novels, checking out the night sky using telescopes provided for free from China (in exchange for the green pieces of paper we printed practically for free).  Come to think of it.  It cannot be all play no work.  One thing, we must continue to maintain a top of the world strong military.  If those Chinese suckers come to their sense and ask for the money worth of those green pieces of paper which they have accumulated so much, we can blow them away.  No one dare to ask the Mafia to pay back a loan unless they have a bigger gun.  No one dare to ask us to pay back anything when we are the top superpower with all the super military hardware.  There is a reason why our military budget is more than the military budgets of the next 10 countries combined.


ShaunDuncan
ShaunDuncan

@lpc1998 @ShaunDuncan @thereo @ReneDemonteverde  Your political assumptions are rather... flawed.   First, I fail to see why they would release a retaliatory plan to a plan that is two years old.  Things are often done for current, relevant reasons.  Your associations are a stretch at best. 

  Also, regarding diplomacy.  Once an attack has been launched against a foreign nation, I do not believe diplomacy will fare well in the face of death and devastation. How likely is this scenario: "Ow." "And don't do it again."  I've seen people make your flawed arguments before, but the point is simple, an attack on a foreign nation cannot be identified with the level of specificity for your claims to be relevant.  They don't know what kind of an attack it is, they only know that it is an attack.

   As for 'use it or lose it', this is always a mentality.  An attack on your offensive capabilities is (or sensor capabilities to detect an incoming attack), simply put, an attack on you.  When mutually assured destruction comes into play, there is often a bit of weighing, but once someone starts to reduce your offensive capabilities, what incentive would they have to stop beyond the one that would have stopped them in the first place, the threat of retaliation from you.  Blinding the enemy would rarely encourage peace and in human beings would generally cause fear and panic, as a natural response, escalating the chance of violence.  The 'dangerous battle plan' is just that... a battle plan for when the chance for a peaceful resolution is lost.

   On the map showing the offensive capabilities of China against the U.S. I doubt the point of posting the map was not to tell America what they can do, it was more likely to tell THE WORLD what they can do.  I wonder if, perhaps, it was done for the benefit of Russia which is negotiating with China now.  It also largely reflects their ambition as a nation, not only to become a world superpower but to control a portion of the world, including it's resources.  Tibet, China, Taiwan, and to a limited extent they have influence over North Korea. (Directly taking it over would actually complicating things for them, politically.)

   Back to escalation in the event of an attack.  There will be no 'limiting escalation' of such a conflict because the scenario you describe IS escalation.  An attack is, simply, an attack.

    The irony is that the single most effective solution to prevent World War 3 is simply granting Japan the weapons it needs so that they and China can have a 'mexican standoff', so to speak, without the need for our intervention.  Why? Simple, Hitler was given a small piece of land, and did not stop.  Those who forget history are doomed to repeat it.  If the China and Japan conflict is allowed to escalate, there will be another World War, or a continuation of the last one (Remember, the lines drawn between North and South Korea are still there.)

   Not to mention the comments of the Prime Minister Shinzo Abe of Japan on him seeing the mirroring of the tensions at the time of World War One.  I do not think he would say such words so lightly.  In fact, knowing how careful the Japanese are in general, I recognize a need for a change in policy.

   The two worst-case scenarios are a blockade of Japan by the Chinese, and an attack upon Japan by the Chinese.  And before you ask why those two are worst case scenarios, I have considered history, the political tensions in the area, and the current sentiments/capabilities of all those involved.  

lpc1998
lpc1998

@ShaunDuncan @lpc1998 @thereo @ReneDemonteverde

Much of the devastation of the US industrial and manufacturing bases are attributable to these three economies.

Probably, China is telling the US that the AirSea Battle Plan of the latter is very dangerous:

" Second, AirSea Battle’s emphasis on pre-empting China by striking early against the PLA will continue to compress the time available to decision-makers in a crisis. As military plans become increasingly dependent on speed and escalation, and diplomacy fails to keep up, a dangerous ‘use it or lose it’ mentality is likely to take hold in the minds of military commanders. This risks building an automatic escalator to war into each crisis before diplomatic efforts at defusing the situation can get underway.

And finally, AirSea Battle calls for deep strikes on the Chinese mainland to blind and suppress PLA surveillance systems and degrade its long-range strike capabilities. Such an attack, even if it relied solely on conventional systems, could easily be misconstrued in Beijing as an attempt at pre-emptively destroying China’s retaliatory nuclear options. Under intense pressure, it would be hard to limit a dramatic escalation of such a conflict – including, in the worst case, up to and beyond the nuclear threshold."

http://thediplomat.com/2011/08/americas-dangerous-battle-plan/

es12777
es12777

@a09b24 Our military budget is huge you are so right, but that is not  what counts. When we build a fighter jet it costs us 145m when they build a fighter jet it costs then 12m no matter how good is the one we build cant not withstand 12 of their planes. This measure is now, imagine when they get a little bit more advance. We have to find a way to get into productivity. True productivity at low cost, because the gap in technology is not as big as 15 years ago.Is not only about the Franklin paper. Remember we will have to supply ourselves from that moment on. since no one will do business with us unless we pay with goods since our money will be worthless. You may say, What are they going to use as a replacement of dollars. Well I can tell you there will be options out there better then ours, once our system is down.