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China & The POTUS: A History of Misdirection, Failures and Empty Wins

November 16, 2020

By Kenneth Rapoza, CPA Industry Analyst

When China entered the World Trade Organization, Washington took a "wait-and-see" approach to Beijing. Bill Clinton, who helped convince the world it was a good idea to let China into the WTO, thought it set the table for China to become more like South Korea. Instead, about five years after joining, the Bush Administration started to notice the deck was stacked against them. 

It’s taken 20 years to get here, but like any relationship, 20 years changes a marriage. The US-China relationship is forever changed. Like Barbara Streisand once sang, there’s no going back to the way we were.

President Donald Trump improved on the steps taken by the previous Obama/Biden Administration in addressing trade issues and market access with China. While the Obama Administration got some wins, all of them favorable for Wall Street and financial services and none for manufacturing, Trump rewrote the playbook on China.

The China relationship will no longer be centered on Washington jawboning about where China stands on Pakistan, climate change and the World Trade Organization.  The goals of the previous two presidents seemed to be about embracing China as a new member of the club of powerful nations and make sure they were on the same page on matters dear to Brussels and Washington. That’s about it.

Trump moved the goal posts. He made it more about manufacturing and jobs, while Obama only spoke of that in passing and in the context of the WTO. Bush actually ruled in favor of China imports in order not to get caught up in WTO arbitration hearings.

“We can pursue trade that is free and fair and seek to conclude an ambitious and balanced Doha Round agreement,” Obama had said in his first year in office in 2009. The WTO’s Doha Round ended in 2015. “We can update international institutions so that growing economies like China play a greater role that matches their greater responsibility,” Obama said, a nod to Washington’s singular focus on the WTO.

Bush and Obama hoped China would get the memo on how market economies function. They never did.

Obama was not alone in hoping China would have some sort of “come to Jesus” moment on trade and industrial policy, abandoning state capitalism and its focus on maintaining its role as the Western world’s factory. Xi Jinping came to power in Obama’s second term. He was greeted with a literal red carpet in Los Angeles in 2012 during an NBA finals game between the LA Lakers and the Phoenix Suns, a sport both leaders adored. Maybe they could see eye-to-eye. Instead, Xi became more nationalist than his predecessor, Hu Jintao.

Washington should have seen this coming.

Bush figured this out after a few years of his Strategic Dialogue with China which started in 2006. Slowly, over time, the Executive Branch in Washington has evolved its views of China. We suspect Biden’s views have evolved and will continue to do so should he be the next president.

Small victories on market access have mostly benefited the likes of Goldman Sachs and JP Morgan, now allowed to have their own wealth management office without a Chinese partner. Henry Paulsen, Treasury Secretary under Bush, got that ball rolling. Mastercard was finally allowed to operate this year. Obama got that ball rolling.

This is a game of great powers. We cannot be distracted by a handful of Wall Street victories that really only serve to pump more money into China, not into the US economy. None of those victories led to employment in the small cities and towns that have watched their innovation get hijacked – like Westinghouse’s nuclear power secrets in 2010, and their jobs move abroad. While none of this completely stopped under Trump, it happened at a much slower pace, making him one of the more successful presidents in negotiating the China relationship.

Starting with China’s ascension to the WTO in 2001, Washington has gone from a wait-and-see, benefit of the doubt approach, to developing a harder “enough is enough” skepticism towards China. It would be a headwind for America’s industrial base if that softens.

Bush: Anti-Tariff & Hope for the Best.

Bush’s 2006 Strategic Dialogue with China was designed to “be a forum for discussing ways the United States and China can work together to address economic challenges and opportunities as responsible stakeholders in the international economic system.”

Ex-Goldman CEO Paulson was the leader as Bush was focused squarely on his War on Terrorism. National Economic Adviser Al Hubbard was the second highest ranking official on the negotiating team. To call the two-year dialogue a “negotiation” is a bit of a stretch. They never laid out any real targets for China to hit, other than something on air traffic control and tourism.

The decision to open up trade talks with China in 2006 was launched after watching Beijing run roughshod over its WTO promises for five years straight.

In 2002, the first full year of China’s WTO membership, WTO Director-General Supachai Panitchpakdi said, “The agreement signaled China’s willingness to play by international trade rules and to bring its often opaque and cumbersome government apparatus into harmony with a world order that demands clarity and fairness.”

It did nothing of the sort. Bush saw this right away. But barring steel tariffs imposed on China importers in 2002, he did little else to protect American manufacturing from China’s oversupply and dumping strategy.

Worse yet, China kept its exchange rate pegged at artificially low levels, bestowing significant competitive advantages on Chinese exporters. That exacerbated a phenomenon that came to be known as the “China shock” at the time. That shock was the decimation of manufacturing companies in working class cities and towns, most of them losing out to Made in China.

In 2005, State-owned enterprises were directed to obtain this know-how from foreign partners through “co-innovation and re-innovation based on the assimilation of imported technologies.” Also known as tech transfers. And sometimes known as IP theft.

That same year, China exported more auto parts than it bought from abroad. Shipments to the US rose by 39 percent to $5.4 billion. Chinese imports exacerbated the woes of US industry, with the  October 2005 bankruptcy of Delphi Corp., Detroit’s biggest auto parts maker, being a sign of things to come.

It wasn’t just automotive that got hit by China’s currency. US furniture manufacturers were being crushed. Between 2001 and 2005, at least 230 furniture plants were closed in the United States. Over 55,000 jobs were lost. China’s share of the furniture market went from 42 percent in 2002 to 60 percent in 2005. Before entering the WTO, it was in the single digits.

Congress got angry with the White House in 2005. With Zoellick gone, Bush’s new trade representative, Rob Portman, vowed to undertake a “top-to-bottom review” of the administration’s China trade policy.

That review resulted in a February 2006 report citing, among other things, “continued Chinese barriers to some US exports; failure to protect intellectual property rights; failure to protect labor rights and enforce labor laws and standards; unreported and extensive government subsidies and preferences for China’s own industries.” That report set the table for the Strategic Dialogue of 2006.

Based on a report from Foreign Policy magazine in October 2019, some of the wins from Paulson included a Chinese commitment on emissions trading – which didn’t happen until 2017 -- and a tourism promotion accord.

Trade negotiators who participated in the talks told Foreign Policy that there were no breakthroughs.  “It was interesting—there were these canned presentations, but absolutely nothing I could tell came out of it,” said Warren Maruyama, the general counsel at the Office of the US Trade Representative at that time.

Then the 2008 financial crisis hit. It lent the US-EU economic model a massive blow. Reformists in China wanted nothing to do with copying that system. China’s economy became even more state-controlled.

Obama’s famous “Asia Pivot” tried to get China not to clam up, and to focus America’s attention on Southeast Asia as a potential wedge issue with China if they didn’t behave. His focus was almost entirely Wall Street-centered. Climate change was a close second. It succeeded in two ways: US investment banks can now set up shop in China. China has been told that climate change is the future policy setter for the Western World and, as a result, China ramped up in every aspect of technology that will power a post-fossil fuel economy. They’re now the world’s leader in solar panel manufacturing, and electric vehicles.

Obama: Wall Street Wins & China Becomes Green OPEC

Obama’s upgraded trade talks were called the Strategic and Economic Dialogue. This one had more of a market focus to it than Bush’s geopolitical and WTO policy focus. They met seven times, first in Washington DC in Obama’s first three months in office. The last round was held in the summer of 2015.

Like Bush, none of it focused on manufacturing. Reshoring was never discussed.

The last year's strategic dialogue covered Obama’s favorite topic -- climate change – followed by Asia-Pacific regional politics, the South China Sea, United Nations issues, science and innovation, green ports and the illegal trade in animals and plants.

Obama realized some changes, many more than Bush.

He wanted China to lower its C02 emissions and they did start to decline as it cut back on coal. 

US oil exports to China rose 10-fold. 

With the White House’s keen focus on climate change, China ramped up solar panel manufacturing and crushed domestic US producers.

The Treasury Department’s final report on the outcomes of the S&ED shows that in 8 years American manufacturing was not up for debate.

*       *       *

We already know how Trump thinks about China.

Joe Biden now says he wants to “build back better” and vows to launch a campaign of “international pressure” against China.

To do that, Biden cannot give our allies veto power over what is best for American manufacturing and the blue-collar voter both parties are fighting for now. Having the intellectual property in Silicon Valley but making most of the product abroad is no way to build back better.

Like any relationship, time changes the mood and the dynamic.

If China and the US were a married couple, we have hit full mid-life crisis. Just as the family dynamics of a couple with a child is forever changed, a couple with a second one added to the family is changed even more.  Try as one might, there’s no going back to the past.

Every president has shown that giving Beijing time and waiting and hoping is a fool’s errand.

The China-US relationship must be laser focused on shifting supply chains to favor domestic production as opposed to sweeping trade deals that give companies the financial incentive to offshore labor.

Such a policy would have the US in retreat, succumbing to the ethos of the stateless multinational corporation that has long seen China as the better growth market, with a more pliant labor force and all the best ports. Let’s just make everything there. We can assemble and invent and let China build, is how we hear their mantra. That should sound like nails on a chalk board to American manufacturing labor.

Lastly, no American president should allow China to control key items in the supply chain of important goods like essential medicines, and future technologies powering a post-fossil fuel economy. Bush and Obama didn’t address national security in our supply chains. Trump did. Biden must. 

If that is not on the table in 2021 and beyond, we shouldn’t be shocked to learn who wears the pants in this sad, and highly dysfunctional family.

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