I was having dinner with one of Wall Street’s Masters of the Universe recently, and he told that he had just been in Beijing and had read senior Chinese leadership the Riot Act.
“Oh really,” I said. “And exactly what did you tell them?”
He leaned in and whispered: “I told them that they had deceived us, that they were now our Russians.”
Meaning, I assume, that the Chinese are now our arch enemies. This is unfortunate. However, instead of ‘enemy,’ there is a more accurate word that describes America’s relationship with China: ‘rival.’ I’ll expand on that a little later.
Trump has a point
It’s true because some Americans — including prominent ones — think China is the enemy. And it’s unfortunate, not only because it applies the framework of a previous relationship to a current one (usually not a good thing) but also, more importantly, because it’s off-base.
First, we should all recognize that Donald Trump has a point. Our trade relationship with China is flawed. Its current state reflects a time when China was a much smaller, developing nation. Back then, say circa 2000, we were more than willing to overlook trade imbalances and one-sided practices like mandatory joint ventures. Even intellectual property theft was grudgingly tolerated because of the upside, which was a massive and cheap manufacturing base for American companies and huge demand for U.S. Treasury securities. Who cares if the Chinese stole some schematics, they don’t really have a military anyway, right?
More recently, as these grievances became less tenable, Chinese leadership insisted they would change their ways.
Flash-forward to today, and it becomes much more difficult to justify this status quo. First, the Chinese economy is no longer a pipsqueak. It’s the second largest in the world with a bullet (with a GDP now at $14.1 trillion, up from a trillion at the turn of the millennium.) China’s economy is poised to exceed US GDP (now $20.4 trillion) in less than 15 years. Sure China’s per capita GDP is only $10K versus the US at $63K — but that gap is closing fast too.
Second, the Chinese did not keep their promises in terms of ending the trade imbalance and the joint venture requirements, rolling back one-sided tariffs and putting an end to IP theft. That’s caused even a number of heretofore China bulls, like Blackstone’s Steve Schwarzman and former Treasury Secretary Hank Paulson, to become panda bears, to a degree.
In a speech on November 7 at the Bloomberg New Economy Forum in Singapore, Paulson noted that, “The United States played the decisive role in facilitating China’s entry into the World Trade Organization. Yet 17 years after China entered the WTO, China still has not opened its economy to foreign competition in so many areas. It retains joint venture requirements and ownership limits. And it uses technical standards, subsidies, licensing procedures, and regulation as non-tariff barriers to trade and investment. Nearly 20 years after entering the WTO, this is simply unacceptable.”