How to get China to play fair on trade?
Chinese President Xi Jinping is visiting the U.S. this week to bolster China's trade standing even as its economy is in upheaval. But rather than welcome Chinese commercial interests with open arms, a new report from a technology innovation think tank suggests a policy of "constructive confrontation" to get the country to play within international rules.
According to the report from Information Technology & Innovation Foundation, a "yawning gap" separates the commitments China made to enter the World Trade Organization in 2001 and its subsequent actions. Even though the country did reform "thousands of laws" and complies with "many of its WTO commitments ... Chinese economic and trade policies increasingly reject or undermine the foundational tenets and principles upon which the WTO, and indeed, globalization is based."
"For China, getting into the WTO was more about gaining carte blanche protection against trade enforcement measures other nations might want to unilaterally take against them than it was about driving internal reform and moving toward a market-based economy," report co-author Stephen Ezell, ITIS vice president of global innovation policy, told CBS MoneyWatch.
The problem, according to the report, is that China fends off reforms that would open its markets to more competition but makes use of trade agreements to push into international markets. Some of the promises it allegedly failed to fully deliver on include requiring state-owned enterprises to make purchases on commercial considerations, opening its telecommunications market to competition, manipulating technology standards to block foreign competition and significantly subsidizing its exports.
For example, it has issued regulatory sanctions against companies like Qualcomm (QCOM). And just last week, China pushed major U.S. tech firms to accept conditions that could ultimately require the businesses to turn over user data and intellectual property to the government.
Anil Gupta, chair of strategy, globalization and entrepreneurship at the University of Maryland's Smith School of Business, said the issue of government procurement is particularly thorny because China owns a large number of major corporations. "American manufacturers have found themselves largely shut out from the Chinese (electrical power generation) market," Gupta said. "The reason for that has to do with government procurement fairly systematically favoring Chinese suppliers."
Gupta also pointed to direct and indirect subsidies, like providing R&D assistance "at close to no cost" or overpaying Chinese vendors so the companies have more resources to compete globally.
In some sectors, foreign competitors are still effectively blocked. "In the auto sector, it was true in 2001, but is (still) true in 2015, that foreign car companies cannot own more than 50 percent of their ventures," Gupta said. Even if a car company is successful there, local partners get the majority of the profits.
"In China, there's always been this schizophrenia about the role of the state, the power of the state, versus the role and power of the market," Gupta said. "Under the current leadership, that has become even more accentuated."
According to William Andrews, an associate professor of international business at Stetson University, a good portion of that attitude owes to China's "collectivist culture," which differs from the Western focus on promoting individual businesses rather than a country as a whole.
"They're quick to find moralizing reasons to keep markets closed. But really what they're intent on doing is ... holding up the interests of the state," he said. "They're viewing the goal as this collective betterment of China. But we are irked by that because it seems to violate the tenets of free-market capitalism and intellectual property law."
According to the report, other WTO members made a mistake by being too patient. "'If we just give China more time to adapt to principles of a market-based economy (they'll improve), but we've been playing this waiting game for 15 years now," Ezell said. "It's been death by a thousand cuts."
But pressure like threatening an end to China's WTO membership is problematic. "It's a little bit easier to get the toothpaste out of the tube rather than back in," Andrews said. "To get them out would be virtual economic war and considered a highly aggressive move on our part from the [national] security standpoint. Whether or not that would be politically viable at this point would be quite the challenge."