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INSIGHT
The Journal of the American Chamber of Commerce in Shanghai - Insight January/February 2019
CHINA AND AMERICA
www.amcham-shanghai.org
Contributions from: Brad Setser 16
Kenneth Jarrett 05 Arne Westad 18
Charlene Barshefsky 08 Victor Shih 21
Wang Yong 12 Mareike Ohlberg 23
INTERVIEW P.26 MEMBER NEWS P.30 BITS AND BOBS P.38
Join our WeChat:
Meet Ker Gibbs, AmCham Report on AmCham Shanghai’s Interesting news items
Shanghai’s new president government appreciation dinner you might have missed
FEATURES
INSIGHT
The Journal of the American Chamber of Commerce in Shanghai - January/February 2019
amcham shanghai
President special FEATURES
KER GIBBS
VP of Administration & Finance 05 How Big a Reset for U.S.-China Relations?
Helen Ren
An overview by Kenneth Jarrett, president of AmCham Shanghai 2013-2018
VP of Operations
SHILPI BISWAS 08 On Trade, Reform and the Future of Relations
Directors Discussion with Charlene Barshefsky, chief negotiator of China’s WTO Agreement
Committees
Jessica Wu
12 U.S. and China: Domestic Adjustment and Trade Relations Crisis
Communications & Publications Peking University’s Wang Yong analyzes relations from the Chinese perspective
Ian Driscoll
16 China’s Trade & Investment Policy: Time to Right the Wrongs
Government Relations & CSR
Veomayoury "Titi" Baccam Brad Setser of the Council on Foreign Relations on the merits of America’s trade complaints
Trade & Investment Center
18 Clash of the Titans
LEON TUNG
Q&A with Harvard University’s Arne Westad on China’s issues of governance and U.S.-China relations
21 The Pitfalls of China’s Industrial Policies
Victor Shih of the University of California San Diego argues that China’s industrial policy is bad for its economy
INSIGHT
23 China’s Social Credit System
Editor-in-Chief
Ruoping Chen MERICS’ Mareike Ohlberg on what companies should know and what they can do to prepare
Editor
Doug Strub
Content Manager
Juliusz Mosoni
MEMBER NEWS
Design
Gabriele Cordioli 26 Q&A with AmCham Shanghai’s new president
Ker Gibbs on the Chamber’s priorities, business and life in China
Printing
Snap Printing, Inc. 29 Board of Governors Briefing
Notes from November and December board meetings
30 17th Annual Government Appreciation Dinner
Report on the Chamber’s government appreciation dinner
INSIGHT
Sponsorship 32 Event Report
(86-21) 6279-7119 Recap of selected events from the past two months
Story ideas, questions or
comments on Insight: Please contact
Ruoping Chen
(86-21) 6279-7119 ext. 4583
34 Month in Pictures
ruoping.chen@amcham-shanghai.org Selected photos from last two months’ AmCham events
36
Insight is a free monthly publication for the
members of The American Chamber of Committee Chair’s Corner
Commerce in Shanghai. Editorial content and
sponsors' announcements are independent With Barbara Ex, co-chair of the Entrepreneurship Committee
and do not necessarily reflect the views of
the governors, officers, members or staff
of the Chamber. No part of this publication 38 Weekly Briefing Bits & Bobs
may be reproduced without written consent Irreverent takes on the news
of the copyright holder.
January / February 2019
Special thanks to the 2018-2019 AmCham Shanghai President’s Circle Sponsors
Shanghai Centre, Suite 568
1376 Nanjing West Road
Shanghai, 200040 China
tel: (86-21) 6279-7119
fax: (86-21) 6279-7643
www.amcham-shanghai.org
3
Chairman’s As we enter 2019, I would first like to
thank former AmCham Shanghai Presi-
As we near the end of the decade,
Ker and I are committed to bringing
NOTE dent Kenneth Jarrett for his significant
contributions to the Chamber and its
more value to our members. We will
achieve this through efforts like offer-
members over the past five years. Un- ing more value-added services, im-
der Ken’s leadership, AmCham Shang- proving content distribution through
hai expanded deeper into the Yangtze digital platforms, scaling up our oper-
River Delta, including the cities of Su- ations in Nanjing and Suzhou, and ex-
zhou and Nanjing, diversified its mem- ploring other outreach initiatives. While
bership, improved its finances, and strengthening existing committee ac-
played a critical role as the “Voice of tivities will remain a priority, we will also
American Business” in China. He also look for opportunities to serve new or
successfully stewarded the celebra- high-growth industries and segments.
tions of AmCham Shanghai’s 100 th Anni- Last, but very certainly not least, we will
versary. But it was in the last two years, continue our advocacy efforts in China
as trade frictions between the U.S. and and the U.S. Our role as an objective
China increased, that Ken’s value as communicator of members’ concerns
president became increasingly evident. to government officials has never been
As one of the most well-respected so important.
China hands, Ken provided unfailing One word that recurs in the para-
counsel to numerous American compa- graphs above is “member.” There is a
nies and committed himself to making simple reason for this: we are a member
members’ voices heard by both Chinese organization. You are our primary con-
and American policymakers. Our advo- stituency, and your business success
cacy efforts have benefited a great deal is our priority. To help you succeed, we
from Ken’s experience and insight. As also need your feedback. If you have
Ken moves on to the next chapter of his any suggestions about how to improve
distinguished career, I wish him every the Chamber, we will always welcome
success in his new endeavors. your feedback.
ERIC ZHENG
Following in Ken’s esteemed foot-
Chairman of The American Chamber I
steps is Ker Gibbs, a long-standing Have a successful 2019!
of Commerce in Shanghai
Chamber member who has also served
as the Chamber’s chairman. Ker is also
a long-time student of China and has
held management roles at Apple, HSBC
and Korn Ferry, among others. His
broad commercial experience coupled
with his extensive China background
made him uniquely qualified for the
position of president. The board is con-
fident that Ker has the strong commit-
ment and necessary skillset to lead the
Chamber through the next phase of its
development.
In conjunction with the board, one of
Ker’s priorities will be to keep leading
our efforts to advocate win-win trade
relations between the U.S. and China
at a time of unprecedented tensions.
That will mean keeping the spotlight
www.amcham-shanghai.org
on structural issues in China that con-
cern our members like market access
restrictions, IP violations, and a lack
of the rule of law, while encouraging
policymakers in both countries to find
common ground that delivers work-
able and measurable solutions to the
trade dispute.
4
special FEATURES
How Big a Reset
for U.S.-China
Relations?
By Kenneth Jarrett, president of AmCham Shanghai 2013-2018
I
magine a special meter that could has never been free of stress. Even about current trends, let us first con-
measure the state of U.S.-China in the post-normalization heyday of sider if dire pessimism is justified.
relations. The meter’s scale would “constructive engagement” as a U.S. It is popular today to criticize past
read “cooperation” at one end and policy objective, each government U.S. administrations for being naïve
“competition” at the other. If we looked hedged against the other. Over the about China, blindly assuming, so the
at that meter today, the needle would four decades since diplomatic nor- argument goes, that China would en-
be pointing squarely at competition. malization in 1979, there have been thusiastically embrace market eco-
Few would say otherwise, either in several reminders that the United nomics and allow a greater degree of
Beijing or in Washington, DC. States and China have some funda- political freedom. Viewed from today’s
The United States and China are mental differences. Tiananmen best vantage point, movement on both
undergoing a strategic realignment in demonstrates this point, but there fronts seems to be in the wrong direc-
their relationship. Where will the nee- has also been no shortage of other tion, contributing to the sense of dis-
dle stop on our special meter? Will it crises, with the mistaken bombing enchantment with China among many
stop at competition, which could be of the Chinese embassy in Belgrade Americans. Genuine political reform,
viewed as a normal state of affairs (1999) and the EP-3 plane collision off however, should not have been con-
between two big powers, or head off Hainan (2001) as two excellent exam- sidered likely, which means that disillu-
A key U.S. the scale into territory of far greater ples. Both episodes raised questions sionment in this regard is not justified.
objective of concern, with each country viewing in the minds of many Chinese about But in the realm of economics,
constructive the other as an adversary? That is the American attitudes and friendship. there are good reasons to feel dis-
engagement question on the minds of many Amer- Likewise, many Americans have appointed. China today is the second
was to get China ican business leaders today. doubts as they read about China’s in- largest economy in the world and the
to participate in This issue of Insight offers pre- dustrial hacking and expansion in the largest manufacturer. It is 17 years
internationally views of 2019, including what we South China Sea. And if one goes fur- since China joined the WTO. While
accepted should expect with respect to U.S.- ther back in time, the conflicts were the private sector in China has made
structures – to China relations. In this article, let me even more severe: direct armed great strides and is responsible for
“play by the rules” remain faithful to the outlook orienta- conflict in Korea and indirect conflict most of the country’s GDP, the heavy
January / February 2019
in that sense. tion of this issue, but do so mainly by during the Vietnam War. hand of the state is felt across the
Today, China has looking at the origins of the current I offer these comparisons not to economy and not getting any lighter.
upped the ante tensions before peering into my crys- minimize the significance of the re- State-owned enterprises dominate
and wants to tal ball. alignment currently underway, but in too many industries, foreign com-
create its own As we worry about today’s bilat- simply to make the point that our two panies remain subject to excessive
structures. eral problems, we should remem- countries have faced some tough restrictions, and the pace of eco-
ber that the U.S.-China relationship challenges before. Before we despair nomic reform – as understood by
5
Western observers – has slowed ap- like what they see. past decade has been a challenging
Few would have preciably. This is not what the foreign Moreover, the political climate one for Americans. Notwithstanding
predicted that business community thought China’s within China has changed under Xi the current strength of the U.S. econ-
American views economy would look like nearly two Jinping in a way that raises additional omy, the last ten years have been
toward China decades after WTO accession. concerns in Washington, DC. There defined by the “Great Financial Cri-
would harden so This is not to say that China has has been a gradual tightening of po- sis” and lingering conflicts in Iraq and
quickly. Perhaps been standing still. There have been litical controls in recent years. Local Afghanistan. These have extracted a
this is just plenty of changes, but many in ar- media is less daring, social media is horrific toll, not just in blood and trea-
another example eas that only fuel the growing sense heavily monitored, intellectuals are sure, but also on the national psyche.
of the American of competition and tension with the more hesitant to speak out, and im- In addition, social tensions are on the
tendency to either United States. For example, China’s portant pillars of civic society – such rise, domestic politics are increas-
romanticize or foreign policy under Xi Jinping is far as the legal profession and religious ingly polarized, and many Americans
demonize China. more assertive than China under organizations – are under pressure. question the benefits of globalization.
Deng Xiaoping or even Jiang Zemin. Xi Jinping’s anti-corruption campaign, In short, America today is not the self-
A key U.S. objective of construc- which was sorely needed and remains confident superpower of yesteryear.
tive engagement was to get China highly popular, has helped revive the Thus, just when the United States is
to participate in internationally ac- Chinese Communist Party (CCP) as a feeling anxious and uncertain about
cepted structures – to “play by the bedrock institution in China today, but its direction and global stature, a dy-
rules” in that sense. Today, China has ideology is once again the ‘key link’ namic China appears in the rearview
upped the ante and wants to create and the party is making its presence mirror. This undercurrent shapes the
its own structures. Examples abound felt across Chinese society – includ- bilateral relationship and contributes
– the Asian Infrastructure Investment ing in the business sector. Depending to the growing sense of mistrust and
Bank, Belt and Road Initiative, and on how far this goes, a revived Com- suspicion.
Shanghai Cooperation Organization munist Party could become a new As a result of all this, China today
to name just three. China’s assertive- point of friction between the United has few friends in the United States.
ness even extends to offering a de- States and China. Social credit scores, In fact, there seems to be a sudden
velopment model with fewer political a renewed emphasis on party “cells” convergence of views among the
strings attached, sometimes referred within companies, and the elimination key American actors in U.S.-China
to as the “Beijing Consensus,” an- of term limits for Xi Jinping in his role relations – government, Congress,
other example of China offering alter- as head of state, conjure up negative business, academia, media and la-
natives to the status quo structures images in the United States. Is the bor – that China is a bad actor and
built since WWII under American CCP, which had been evolving into a the United States must stand firm
leadership. This just strengthens the “market Leninist” party, now returning and challenge China on all fronts.
American worry that China seeks to to its roots as an old-fashioned “Marx- Constructive engagement as a policy
challenge those global structures. ist Leninist” party? That is another approach is thoroughly discredited,
When you add to the mix China’s ac- question shaping the current U.S.- even though the policy had many
tions in the South China Sea, China China dynamic and creates additional achievements and was supported by
starts to look like an aggressive ac- opportunities for conflict. different administrations, both Demo-
tor who cannot be trusted. In short, Changes in China are just one part crats and Republican alike, over sev-
compared to the “hide and bide” of the equation. The United States eral decades. The swiftness of this
foreign policy strategy advocated by has been undergoing change as well collapse has been breathtaking. No
Deng Xiaoping, China under Xi looks and shifting variables in our country wonder Beijing was caught off guard
quite different. Many Americans don’t are part of the bilateral calculus. The and slow to realize that the para-
digm had shifted. Few would have
Also known as GDP
predicted that American views to-
ward China would harden so quickly.
Perhaps this is just another example
of the American tendency to either
romanticize or demonize China. Our
desire to reduce China to a bumper
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sticker remains strong and today’s
sticker message doesn’t bode well for
the future.
What then, does that future look
like and what does it mean for U.S.
companies active in China? Let me
end this essay with some discussion
of those questions.
6
special FEATURES
Market Leninist skyline
In the near term, one should ex- new global posture is viewed with ity contributes to China’s economic
pect further deterioration in U.S.- apprehension. And when the United development but also strengthens
China relations. Within the Trump States reacts, China views this as the U.S. economy. This is not an ei-
administration, policy hawks who be- containment. Many Chinese believe ther-or situation. On the other hand,
lieve China constitutes a strategic ad- the United States wants to stymie growing anti-China sentiment in the
versary to the United States occupy China’s economic development and United States and a long history of
most key positions. The more extreme prevent China from assuming its Chinese ambivalence toward foreign
of this group advocate “decoupling” of rightful place on the world stage. We companies adds political complexity
the two economics, even if that is un- must break this vicious cycle. to business decision-making. Even
realistic and would be harmful to the If China must explain itself better, after 40 years of diplomatic rela-
United States. At the very least, the then the United States must learn to tions, Americans and Chinese need
policy hawks now in command are accommodate itself to a strong and constant reminders of the benefits
determined not to facilitate China’s powerful China. This will not be an of U.S.-China interaction. Commerce
further rise, hence the particular at- easy adjustment. Since the collapse is a natural candidate. The Ameri-
tention to emerging technologies as of the Soviet Union, the United States can business community was once
a key battleground. This could lead to has been the sole global superpower. viewed as providing a kind of political
greater conflict between U.S. industry China may not be America’s peer right ballast at times of bilateral tensions
and the U.S. government, to say noth- now, but it could challenge the United and we could again play that role.
ing of greater tensions between the States in ways the Soviet Union never But there are preconditions for this
If China must United States and China. could – particularly in the economic to happen. For Beijing, it must make
explain itself Both governments could do more realm as China overtakes the United clear that foreign investment in China
better, then the to improve the atmosphere. In the States as the world’s largest econ- remains welcome and that foreign
United States case of China, it must work harder omy. China is already the top trading companies will be able to compete and
must learn to to explain its actions and objectives, partner for many of America’s friends operate in China fairly and freely. If this
accommodate especially its international ambitions. and allies. It will take enlightened were to happen, U.S. business will again
itself to a strong China is behaving differently than in leadership in both Beijing and Wash- become vocal advocates for a healthy
and powerful the past but Beijing, still fumbling ington to increase the likelihood that U.S.-China relationship. For Washing-
China. with the concept of soft power, the future operational framework ton, it must show that its approach to-
has not prepared the world for this between our two countries improves ward national security is appropriate
change. In contrast, China’s lead- prospects for cooperation and trust and limited and that it welcomes all
ers have done a much better job rather than create an atmosphere of other business activities. China’s vague
explaining the economic transition conflict and suspicion. and expansive definition of national se-
January / February 2019
that has been underway in China the All of this translates into some dif- curity is already bad enough for busi-
past 40 years. But now that wealth ficult times ahead for American com- ness. These are big ifs, but it is imper-
and prosperity provide the basis for panies. On the one hand, the reasons ative we succeed. We do not want to
political power and influence, China for staying in this market are stronger live in a world defined by an unhealthy
has been less successful at prepar- than ever. For many U.S. companies, rivalry between the United States and
ing the world for that transition. Par- China is already their second largest China, and there is no reason why that
ticularly in the United States, China’s market. American business activ- is how our future should look. I
7
On Trade,
Reform and
the Future of
Relations
A discussion with Charlene Barshefsky,
chief negotiator of China’s WTO Agreement
By Ruoping Chen
Ambassador Charlene Barshefsky is WilmerHale’s Senior International Partner. She joined the firm after serving as the US Trade
Representative - the chief trade negotiator and principal trade policymaker for the United States - from 1997 to 2001, and acting
as deputy USTR from 1993 to 1996. As the USTR and a member of the President’s Cabinet, she was responsible for the negotiation
of hundreds of complex market access, regulatory and investment agreements with virtually every major country in the world. She is
best known internationally as the architect and chief negotiator of China’s historic WTO Agreement, as well as global agreements in
financial services, telecommunications, intellectual property rights, high-technology products and cyberspace.
How would you analyze the G20 and raises the tariff rate to 25%, volatility will increase to unaccept-
meeting between Presidents what do you believe would be the able levels. So I have had a theory
Trump and Xi and does that affect immediate consequences for both for some time that the Trump ad-
your outlook for U.S.-China rela- economies? ministration will want to conclude
tions in the coming year? I may be wrong, but I have long an agreement — that doesn’t mean
I think the relationship will re- held the view that the United States it will be easy for China to meet the
main volatile because each country does not want to get to the 25% tar- U.S., but it also means the U.S. will
challenges the other in many differ- iff level, nor does it want to add in to have to compromise in the inter-
ent ways and each leader uses the the equation another $267 billion of ests of economic growth and in the
opposite country for political and Chinese imports. The effects on the interests of reducing stock market
nationalistic purposes. I think the U.S. economy would be very signifi- volatility.
relationship will remain unstable cant and, most particularly for the
www.amcham-shanghai.org
but hopefully sufficiently manage- Trump administration, the effect on How do you view the Trump adminis-
able that commerce can proceed the stock market would be poten- tration’s strategy on trade relations
with greater certainty and punitive tially severe. We see stock market with China? What about the argu-
tariffs are removed on both sides. volatility now when the tariffs are at ment that he at least has gotten the
10% and folks fear that talks aren’t Chinese government’s attention?
If a deal is not reached by March going well. What happens when I think there would have been
and the U.S. goes ahead and levies in fact talks break down and tariff a much more effective and less
tariffs on another US$267 billion rates dramatically increase? I think damaging way to get China’s atten-
8
special FEATURES
tion. By less damaging, I mean less its discrimination against foreign they’ve chosen to pursue develop-
damaging to the United States, and multinationals. The incidences ment and growth that is the issue,
that is to have stayed in TPP. China of discrimination are many, very not that they are developing or
was very concerned about TPP and well-documented and pervasive. growing.
its exclusion from it. Had the United China needs to curb its subsidies
States stayed in TPP, it would have to homegrown industries includ- Experience has shown that, even
begun to create an alternative to ing the state sector, rather than in- if China were to make policy
the current system. If the U.S. took crease those subsidies and crowd changes, when it comes to follow-
the TPP agreement and expanded out private sector investments as ing through on things like WTO
it some in Asia, for example adding well as disadvantage foreign com- directives, there has been regu-
Korea or Indonesia, and then per- panies. latory obfuscation and foot-drag-
suaded Europe to join, you would ging. So how does the U.S. realisti-
have near 60% of global GDP, which cally enforce any agreement?
would leave a choice for China: Ei- There would have There will have to be a set of
ther change your practices or be been a much more metrics and perhaps some ar-
at a permanent and considerable rangement between the two on en-
effective and less
commercial disadvantage. forcement — whether that’s in the
This would have been the more damaging way form of bilateral dispute settlement
effective course. It is a less antag- to get China’s subject to exceptionally rigorous
onistic course. It is also a course attention...and that timelines and perhaps injunctive
that is predicated on a set of rules relief, or whether that’s arbitration
is to have stayed in
which in the longer term is in the or simply a return to punitive tariffs.
U.S. interest. And it is a course dur- TPP. Certainly there will have to be some
ing which the United States could system of monitoring and a series
suggest that China seriously con- of metrics developed against which
sider joining, but only on the basis Some agreement or set of progress can be measured.
of a new set of rules. This would agreements is going to have to I think that China made a grave
also have unlocked progress in be reached on cyber espionage, error in the context of the Strate-
the WTO, which has been stymied forced technology transfer and gic and Economic Dialogue and
since the launch of the Doha Round. intellectual property, the latter of that was to use the United States’
So to my mind, the most effective which of course is a long-standing love of process as a way to thwart
course would have been the one issue never satisfactorily resolved, responsiveness to U.S. requests. In-
that Trump jettisoned on his second although certainly progress has stead, China engaged in foot-drag-
or third day in office, and that would been made. ging, setting up committees and
have been to stay in TPP. Those are among the basic holding endless meetings which
things that would have to be done. yielded nothing but a lot of talk. The
In your opinion, what are the most The issue for China is not whether result of that strategy was the kind
important reforms China needs to it should develop — of course it of explosion you saw when Trump
make to change its unfair trade should. The issue isn’t whether it began talking about China. He
practices? should grow — of course it should. tapped into tremendous frustration
You have of course the failure The issue is how it does those on the part of the business com-
of China to maintain a reform and things and it is the manner in which munity and others about the way
opening agenda. Perhaps by 2007
or so, the phrase “reform and open-
ing,” which characterized the period
from Deng Xiaoping through Jiang
Zemin and even very early into Hu
Jintao, was no longer used and
the word was simply “reform,” with
very few allusions to “opening.” So I
think first of all, China has to return
January / February 2019
to a “reform and opening” agenda,
which is to say the reform is in-
tended not merely to make Chinese
companies more competitive, but
to open the Chinese economy to
competition.
Certainly China has to cease
9
but in the 12 years these protective
provisions were in place, almost no
cases were brought. That’s crazy to
think about when one considers the
loss of a million-plus manufactur-
ing jobs in the U.S. during that time
that reputable economists have
attributed to Chinese imports. So
the mistake was not in China joining
the WTO — it’s a fifth of the world’s
population and one of the great na-
tions of the world. The mistake was
in not enforcing the agreement in
these very unique ways.
The U.S. did bring a series of
successful WTO cases against
China, but they tended to be quite
rifle-shot rather than more encom-
passing, and consideration should
have been given to bringing more
in which China had proceeded over cial decisions of state enterprises. encompassing actions. One can ar-
What would Sun
the previous decade. China should These provisions have never been gue there should have been other
Tzu do?
have recognized that at some point used by the United States. Lastly, forms of enforcement under Sec-
its foot-dragging would yield the tion 337 of U.S. trade laws, which
kind of result you see today. That prevent IP theft and so on. But there
was an outcome that was entirely are a number of directions in en-
avoidable had China continued on a forcement that the U.S. could have
reform and opening path during the China made a taken over the 10 years — quite
past decade, rather than pretend apart from the talk fest that went on
grave error in
to respond to U.S. requests, when for those years — that would have
even if progress was made on pa-
the context of
been more effective.
per, facts on the ground got worse. the Strategic
and Economic At the time when you were nego-
Having lived through China’s rise tiating with China, what was the
Dialogue and
and knowing what we know now biggest challenge for you and
about its plans, how do you now
that was to
can you make any comparisons or
view China’s accession to the WTO use the United have any insight into the ways that
nearly 20 years ago? States love of the Chinese think and how they
There’s no question China operate now?
process as a
should have been in the WTO at The Chinese are very pragmatic,
that time and should be in the WTO
way to thwart
very practical, very deal-oriented
now. I think the mistake was a fail- responsiveness and quite entrepreneurial in that re-
ure to use special provisions of the to U.S. requests. gard. The Chinese are always quite
protocol of accession to enforce willing to listen seriously to innova-
China’s commitments. The protocol tive proposals and creative ideas
of accession for China has provi- and can often be brought along.
sions prohibiting forced technology But certainly China has national
transfer, and yet neither the Bush China’s protocol had provisions that aims. Xi Jinping has embodied
nor Obama nor Trump administra- would have prevented the import them in the “China Dream” and the
tions have taken China to the WTO surges that the U.S. saw in the de- notion of tech supremacy, which
www.amcham-shanghai.org
on the basis of those provisions. cade following admission. These can create a challenge when these
China’s protocol contains pro- were provisions designed to pre- kinds of aspirations become almost
visions with respect to the way in vent market disruption in the United an ideological mantra and there-
which state enterprises need to States from Chinese imports. fore rigidly pursued at all costs. It’s
conduct themselves in commercial The Bush administration denied the “at all costs” that of course has
operations, including the prohibi- relief to four different industries un- gotten China into trouble with its
tion on direct or indirect govern- der these provisions. The Obama allies. Let’s bear in mind it isn’t just
ment involvement in the commer- administration granted relief once, the United States that has concerns
10special FEATURES
about China’s commercial conduct: are no longer heads of state. the effects their actions on their
it’s Europe, Japan, Canada, Austra- With respect to where China partners and on the global econ-
lia — many other countries share is today, though, I think Xi Jinping omy and conduct themselves with
similar concerns. has a highly particularized vision of some degree of restraint. I think
So I think that China because it is China in the world, and underneath that advice is also pertinent to the
pragmatic and practical can make that vision are a series of aspirations United States.
changes to its trade regime. I think that are quite specific and indeed
it can begin to turn the corner from not merely aspirational but pre- Given the two countries’ divergent
its divergent stance with respect scriptive in nature. In that regard I courses and the ideologies under-
to market economics and begin to find this quite impressive, that is, for pinning their economies, is Trump’s
take actions that would be more proposed decoupling a sign of the
compatible with market econom- realism with which we should ap-
ics. But certainly China will have to The notion of proach China from now on?
make very difficult decisions. decoupling is I think the notion of decoupling
is rather fanciful, particularly if one
rather fanciful,
Many expected China to evolve takes into account the diminution in
into a Western-style open econ-
particularly if one global growth were the two econo-
omy. That has not happened, and takes into account mies, which are highly entangled, to
the state appears to be reassert- the diminution suddenly decide they shouldn’t be.
ing its control over the economy That raises a dangerous specter of
in global growth
under Xi Jinping. Under Xi, where isolationism and genuine “beggar
do you think China is headed?
were the two thy neighbor” outcomes. It would
I certainly never thought China economies, be better for the two economies to
was headed toward a Western de- which are highly operate on a more equitable basis.
mocracy or anything of that sort. It It would be better if the Chinese
entangled, to
always seemed to me that China economy in particular adhered to
as it became wealthier might be-
suddenly decide market-based economics rather
come more pluralistic, but I also of- they shouldn’t be. than state-led economics, and it
ten said and believe that those are would be better if the two countries
decisions for the Chinese people to got along better for global stability
make, certainly not for the United a country to take a longer-term view and better for wealth creation.
States or any other country to make and have a plan of action against So the notion of decoupling
on China’s behalf. The second thing which it operates. Of course the U.S. would fly in the face of those as-
I would say is that this is not the end does not have any such plan, and pirations and be dangerous for
of history. that is to the disadvantage of the those reasons. But I do think that
Imagine for a moment if Xi Jin- United States. By the same token, the fundamental underpinning of
ping was not the president, imagine not all plans are good plans, and the relationship, which has always
if the head of state was a reformer. not all plans are plans that fit well in been economic, does need to be
Imagine if Donald Trump wasn’t a global system without disrupting straightened out. Without that un-
the President of the United States, that system in extremely dangerous derpinning, the bilateral relation-
and it was a progressive instead. So ways, including for the disrupter, as ship will become increasingly not
both countries have had shifts in we see today. just volatile but hostile, and that is
leadership that one might not have I do think that, as a globalized not an outcome any country in the
anticipated — certainly there are world, countries have to think about world should want. I
never any guarantees — but so too
for neither countries at the end of He has a dream, too
history. New leaders emerge over
time. I’m not suggesting that we
count on that happening as a solu-
tion to the current set of problems.
I’m merely saying that we have to
January / February 2019
be careful that when we think about
where China is today or where the
U.S. is today, this is how it will be
forevermore. We see the effects of
these particular types of leaders on
both countries. We can also imag-
ine a situation where those leaders
11THE U.S.
AND
CHINA
Domestic Adjustment and
Trade Relations Crisis
By Wang Yong
Wang Yong is a professor at the School of International Studies and the director of the Center for International Political Economy, Peking
University (PKU). He is also a professor at the Party School of Ministry of Foreign Affairs of China, president-appointed professor for the HKSAR
Senior Civil Servants Training Program on Chinese Affairs at PKU, and distinguished fellow of Munk School of Global Affairs at the University
of Toronto. Among other roles, he was consultant for the Asia Development Bank, a visiting Chevelier Chair professor of the Institute of Asian
Research at the University of British Columbia, and a member of the World Economic Forum Global Agenda Council on Global Trade and FDI.
T
he year 2018 has witnessed the world’s second-largest economy 19th National Congress of the Com-
the celebration of the 40th and the largest trading country and munist Party of China proposed a
anniversary of China’s reform exporting country. While China has new direction of development in
and opening up, as well as the 40th greatly increased its influence in the two steps: China is set to become a
anniversary of the establishment of global economy, it has also become medium-level developed country
diplomatic relations between China a more comprehensive regional and by 2050, and China will implement
and the United States. It is no coinci- even a global power. the foreign policy of a great power
dence that the launch of reform and However, on the occasion of the with Chinese characteristics. China-
opening up and the establishment 40th anniversary of these two big U.S. relations have also undergone
of China-U.S. diplomatic relations events, China-U.S. relations and the tremendous changes. U.S.-China
took place at the same time, bringing course of reform and opening up political trust has declined, and the
China and the world into a new era. seem to be both undergoing ma- U.S. launched a tariff war on imports
Since then, China has changed from jor adjustments. Based on the tre- from China. Obviously, the U.S. gov-
a backward and poor country into mendous changes since 2013, the ernment and public not only worry
about the trade deficit with China,
but also worry about the impact of
the Made in China 2025 plan on U.S.
industry. The escalation of trade fric-
tion combined with U.S. suspicion
over China’s new policy direction
explains the prospect of a “new Cold
www.amcham-shanghai.org
War,” and even a local “hot” war pos-
sibly caused by a dispute over the
issue of the South China Sea and the
Taiwan Strait.
This development is regrettable. I
believe that in order to find a new di-
rection for China-U.S. economic and
And now for the next 40 trade relations, China-U.S. relations
12special FEATURES
must be placed under an histori-
cal framework. My basic view is that
there are still huge common inter-
ests between China and the U.S., but
we must face up to the differences
between the two sides. Many prob-
lems are due to misunderstandings
between each other. Clearing up
these misunderstandings will help
re-establish political trust between
the two sides.
Domestic adjustment
of the U.S. and China
after climax of
globalization
The policy direction of the U.S. and taken place in both countries are rev- suppliers from Japan and Germany.
China has been basically the same in olutionary, and the domestic restruc- The example of Apple’s mobile
the past 30 years. In the first two de- turing has produced spillover effects, phone reflects the reality of interna-
cades, both embraced globalization. which have aggravated the misun- tional trade in the era of economic
While the U.S. played the role of the derstandings and tensions between globalization: China’s foreign trade is
leader of globalization, China has China and US. large in volume, but the proportion
American been an active follower as the larg- of profit is small. This is illustrated
politicians have est developing country. Both believe Reconfirming the as well by another example: China’s
not disclosed the in the benefits of economic global- truth about state-owned enterprises account for
full picture of ization, and indeed globalization has U.S.-China trade only 10% of the total exports of the
the trade flows, brought tremendous growth to both Economic and trade relations country. Unfortunately, the American
speaking only countries. However, economic glo- have brought enormous benefits public and politicians don’t under-
of the trade in balization has also produced a seri- to both sides. The bilateral trade stand this reality and complain about
goods. ous negative result: disparities be- between the two has reached the the high trade deficit with China.
tween rich and the poor within each highest level of any bilateral trade in Some members of the elite in China
country. The U.S. is the country with history. but in contrast to the views don’t understand the true picture of
the largest wealth gap among devel- of some people in the U.S., the bilat- China-U.S. bilateral trade either, and
oped economies, and China has one eral trade is fair and the distribution are misled to be complacent about
the deepest wealth gaps among the of interests is overall even, because China’s export surplus and compet-
largest developing countries. there is no “forced” buy and sell, and itiveness in the so-called “high-tech”
As part of the responses to this both sides are smart. Regrettably, products.
severe problem, China and the U.S. the American public does not under- American politicians have not dis-
made efforts to readjust domestic stand the truth of China-U.S. trade, closed the full picture of the trade
policies, especially after the global and U.S. politicians intentionally or flows, speaking only of the trade in
financial crisis in 2008. However, due unintentionally conceal the truth of goods. In fact, the United States has
to differences in the political sys- trade for election purposes. a surplus of US$50 billion to $90
tems, the two have adopted different The rise of the global supply billion per year in terms of services,
adjustment policies. The election of chain driven by economic global- not to mention the $500 billion sales
Donald Trump manifested the rise ization largely account for the rapid achieved by U.S.-owned companies
of populism and protectionism, and development of China-U.S. trade. In annually in the Chinese market, in-
“America First” has become the pri- the global supply chain, although cluding a large amount of U.S.-made
mary goal of foreign policy. Chinese China has made progress in high- spare parts and intellectual property.
leaders also recognize the unsus- end sectors, Chinese companies If all aspects of China-U.S. economic
tainability of the past development are generally in the low-end ones. and trade relations are added up,
model and have emphasized adjust- The profits of Chinese factories and they are generally balanced.
January / February 2019
ments in the past five years, including workers are far lower than those of
anti-corruption, poverty alleviation Western investors and multinational Rebuilding political
and rural rejuvenation, environmen- companies. For example, in the case trust
tal protection and overall security of Apple’s iPhone, Chinese factories Politics and society in China and
strategy (prevention of financial cri- and workers have earned only 5% the U.S. are in a state of transition,
ses, cyber security and so on). value added, while Apple has gained and the situation is very complex.
Simply put, the changes that have nearly 60% and the rest goes to parts There are differences within the Chi-
13nese and American elites as to how core driver is not a desire by China to life understanding China’s domes-
to explain the domestic changes and compete with the U.S. for world he- tic political and economic changes.
foreign policies of the two countries. gemony (for example, the Belt and Unfortunately, the U.S. media and
The American elite is divided inter- Road initiative), but fear of a shortage policy research community only pay
Faced with the nally, and the Chinese elite also en- of “international public goods,” which attention to the revision of China’s
increasingly compasses different views. However, include institutions and resources to constitution and abolishing the term
complex situation though the left and the right in the support international cooperation. limit of the president; focus only on
at home and U.S. differ on all sorts of issues, both Faced with the increasingly com- the greater concentration of power
abroad, Chinese call for policy hardening on China. plex situation at home and abroad, and ignore the development and ad-
leaders are Such a domestic atmosphere is ac- Chinese leaders are stressing the justment of China’s domestic politi-
stressing the tually dangerous for the relations. need to deal with three major “traps”: cal economic policies from a broader
need to deal Before rebuilding political trust, The first is the middle-income perspective. For China, leaders at all
with three major both sides should strive to under- trap. The comparative advantage of levels should continue to actively
“traps” stand each other. For Chinese lead- production of labor-intensive prod- communicate with the international
ers, it is important to understand ucts is gradually disappearing, and community on the changes in China,
that adjustments made to domestic to continue to maintain economic to assure the outside world about
policies should not be too far away growth, China must rely on innova- China’s future direction.
from expectations both internally tion, upgrading its industrial level
and externally, and it may be ad- and technology. Made in China 2025 Prospect of economic
visable not to go to extremes in the was conceived in this context, with decoupling
name of maintaining political secu- the hope to use policy incentives to The leaders of China and the
rity. But in fact, the advocacy of the improve the competitiveness of the United States met during the G20
“core values” of socialism are not Chinese economy. summit on December 1 and arrived
The second is the Tacitus trap, at a consensus. They decided to
which refers to the challenge of los- jointly promote efforts to reach an
A stone-faced ing government credibility. The Chi- agreement within 90 days. The sum-
Thucydides nese government hopes to eliminate mit rekindled confidence in bilateral
poverty by 2020, aiming to create a agreements. However, there are still
responsible government, win back many uncertainties as to whether an
the hearts of the people and consoli- agreement can be reached to avoid
date its legitimacy. a trade war. From the current point of
The third is the Thucydides trap view, a defensive China is willing to
and the Kindelberg trap. China has make more concessions, including
tried its best to avoid the “Thucydides increasing market access to address
trap”, in which emerging powers col- the concerns of U.S. business in
lide head-on with major powers. At China, such as market opening, prop-
the same time, in the face of increas- erty rights protection and so on, in
ingly inadequate international public addition to importing more from the
goods supplies, China has made it U.S. to shrink the trade imbalance.
ever-clearer that it is willing to pro- However, China and the U.S. may still
in contradiction with the so-called vide more international public goods be unable to reach an agreement,
“universal” values. Also, the Amer- to strengthen the global governance which would lead to an escalation of
ican elite should learn more about structure. In order to cope with the the trade war, and eventually the de-
China’s changes over the past five “Kindelberg trap”, which assumes coupling of the Chinese and Ameri-
years. These adjustments have been that an emerging power is unwilling can economies.
largely necessary to solve the prob- to provide international public goods, One may argue that there are in-
lems accumulated in the past de- China has come up with initiatives deed more reasons to be pessimistic
cades; the old development model such as the Belt and Road Initiative than optimistic about the prospects
was not sustainable, politically, eco- and the Asian Infrastructure Invest- of China-U.S. relations:
nomically or environmentally. China’s ment Bank (AIIB). China is already the Most importantly, the security
www.amcham-shanghai.org
current policies can be largely ex- second largest donor country in the hawks, long marginalized, have
plained by three “trap” concepts to United Nations, and the country with taken power. Driven by factors such
which the leadership are paying the largest number of international as ideology and big power struggle,
close attention. Many of the policies peacekeepers employed abroad. they tend to perceive the relations
that China has introduced in recent These three “traps” that China’s as a strategic competition character-
years are not the result of the coun- leaders have identified as need- ized by a “zero-sum” game. As a re-
try being strong, but because they ing to be overcome can be the key sult, they tend to look at all forms of
are facing up to its shortcomings. The to the U.S. elites from all walks of contact between China and the U.S.
14special FEATURES
two years, the Democrats and Re- significant losses to the two coun-
publicans, Congress and the Execu- tries and the global economy. As
tive branch will likely compete with the world’s two largest economies,
each other to see who is tougher on China and the U.S. should keep in
China. For the Democratic Party, it is mind these lessons from history:
more in line with its own political in- the trade protectionist measures
terests to prevent Trump from reach- adopted by the U.S. Congress in
ing a trade agreement with China. the Great Depression of the 1930s
The swing in attitude of the Amer- caused the global economy to be
ican business community has wors- torn apart and finally led to the out-
ened the situation. While they do break of World War II; the “Cold War”
not like Trump’s tariff measures, they of the 1950s resulted in several re-
believe the “Section 301” measures gional “hot wars” in the Asia-Pacific
One trade war with a negative eye. The represen- are necessary and an efficient way to region and led to a zero-contact
casualty tatives of such views, Steve Bannon force China to make concessions on confrontation between China and
and Peter Navarro, believe that China market access issues. However, they the U.S. for decades. A competitive
and the U.S. are engaged in an eco- may ignore the dangers of domestic relationship between big countries is
nomic war, and neglect the essence politics and the growing sentiments inevitable, but the two sides should
of mutual benefit between China and towards China, which will make any further strengthen communication
the United States. deal with China more difficult. If the to avoid the harm caused by mis-
After the incitement of populism two countries cannot strike a deal, understandings and misjudgments.
and protectionist sentiment, cou- they may lose more opportunities in The most important thing is to build
pled with the U.S. partisan competi- the Chinese market to competitors consensus and work on common
tion system, the Democratic House from Japan and Europe. interests. This is the responsibility
of Representatives will launch more All these factors make future re- of the two largest economies of the
actions against President Trump after lationships very difficult. Obviously, world for the global economy. The
the midterm election, in order to win there is no winner in a trade war, next two years will be an important
the support of voters ahead of the and it may not be possible to end test for the leaders and for the pub-
2020 presidential election. In the next the trade war, raising the specter of lic of China and the U.S. I
January / February 2019
15China’s Trade &
Investment Policy
Time
Time to Right the Wrongs
Wrongs
By Brad Setser
Brad W. Setser is the Steven A. Tananbaum senior fellow for international economics at the Council on Foreign Relations. Setser
served as the deputy assistant secretary for international economic analysis in the U.S. Treasury from 2011 to 2015, where he worked
on Europe’s financial crisis, currency policy, financial sanctions, commodity shocks, and Puerto Rico’s debt crisis. He was previously the
director for international economics, serving jointly on the staff of the National Economic Council and the National Security Council. He
holds a BA from Harvard University, a master’s from Sciences-Po, and an MA and PhD in international relations from Oxford University.
T
he trade negotiations between the – by nearly any measure – still quite large; These concerns, of course, aren’t new.
U.S. and China are now a central con- both in dollar terms and as a share of world Back in 2009 and 2010, “China Inc.” moved
cern of global markets. There is no GDP, China’s surplus in manufactures is into the solar and wind industries using
doubt that President Trump’s administration about two times its size on the eve of the many of the techniques now associated with
decided to start the current fight, before global financial crisis in 2008. The swing in Made in China 2025. Its policies to support
agreeing to a three-month truce. Yet there is the overall trade balance has come almost indigenous innovation attracted substan-
also little doubt that China’s trade and com- totally through rising tourism spending tial criticism, as they appeared to reserve
mercial practices are an outlier among the abroad, and above all through an enormous access to parts of the Chinese market to
world’s largest economies, and that – unlike rise in China’s commodity imports. firms with indigenous innovation or placed
in some of the Administration’s other trade What does this mean, in concrete terms? the technologies in a joint venture and were
spats – the U.S. has a legitimate basis for Exporters of manufactures looking to sell to thus judged to now be indigenous. Negotia-
challenging China’s trade and commercial China without setting up shop in China still tions on these subjects produced cosmetic
policies. have ample grounds to claim the game is concessions but didn’t fundamentally alter
China’s economy got big before China rigged against them. Relative to the size of the trajectory of Chinese policy.
fully opened up. And China got big before China’s own economy, China’s imports of Nonetheless, during the early years
the state – and the Party – ceased to be manufactures, setting aside imports that en- of the Obama administration, there was a
central institutions in China’s economic life. ter China under special customs provisions plausible path to a deal that China and the
China isn’t as rich as the world’s other large for reexport, have trended down ever since U.S. both could accept. China was at the
economies, but it has already reached a 2003. They now account for only around 5% of time holding down its currency through
size where its deviations from global norms China’s economy. And judging from Chinese heavy intervention in the market. Scaling
stand out. industrial policy aims, many Chinese policy back that intervention offered a clear win for
It is thus not hard to understand why the makers believe that is too high a number. a U.S. economy that needed jobs – a stron-
trade conflict erupted, even though China’s Industries singled out for support under ger yuan made it less attractive for U.S. firms
www.amcham-shanghai.org
large overall trade surplus – historically a the Made in China 2025 program account to locate production for the U.S. market in
major concern of its trading partners – has for a significant share of China’s current im- China and more attractive for U.S. firms to
shrunk substantially. There is no agreed ports. Planes, trains and automobiles ac- produce in the U.S. to sell to China. At a time
consensus on the precise state of China’s count for about 20% of China’s imports of when China wanted to decouple the yuan
current account, but as usually measured, manufactures for its own domestic use. Even from the dollar, scale back its holdings of
it also isn’t far from balance. Yet the way in if Made in China 2025 is officially on its way U.S. Treasuries and reorient its economy to-
which the current account has shifted does out, China’s industrial policies of import sub- ward its rapidly growing domestic market,
matter. China’s surplus in manufactures is stitution will continue to impact global trade. this agenda also had some appeal in China.
16special FEATURES
invest in a U.S. supply chain to supply the
Chinese market. This would be particularly
true if informal “buy China” preferences re-
main, which is a reasonable assumption.
Lifting the joint venture requirement in
key sectors would reduce a key point of le-
verage that “China Inc.” has used to encour-
age the transfer of technology. But provid-
ing U.S. firms with more freedom to invest
in China wouldn’t necessarily address con-
cerns about the current unbalanced pattern
of trade in manufactures. Abandoning the
joint venture requirement – with current tar-
Not a transformer iffs and at the current exchange rate – could
well provide a strong economic incentive to
a number of global automakers to use their
However, a deal centered on currency world-class manufacturer. China factories and supply chains as export
and macroeconomic adjustments was 4. China has a range of means – gov- bases. And so long as China is determined
bound to come under pressure once the ernment procurement, state enterprise to favor domestic aircraft production over
yuan stopped crawling up, given that ap- investment, private investment by firms imports, aeronautics suppliers looking to
preciation had deflected attention away that enjoy the support of the party and get contracts to supply China’s civil aircraft
from the many ways in which China had the state – to provide preference to production would continue to face pres-
tilted the playing field against imports and Chinese-made products. “Buy Chinese” sure to set up wholly-owned subsidiaries in
foreign firms active in China. policies do not have to be written down China,
China also should have expected that to be effective; think of the many ways in There are no easy answers. China needs
its industrial policies would one day come which the state ensures that its airlines to converge toward global norms if it wants
under greater scrutiny as its ambitions in- will support China’s ambitions in civil to participate fully in an open global econ-
creased. In certain sectors, Chinese firms, aviation. omy. But the desire to support (and often
like Huawei, are now close to the global 5. Cyber-espionage. China’s spying is subsidize) the development of Chinese
technological frontlines. And firms in other often directly at nakedly commercial national champions in a range of sectors
sectors worry that a state-backed push to goals. runs deep. Ultimately, though, a China that
expand the market share of Chinese firms While negotiations have now started doesn’t import manufactures or technology
might radically transform the global com- on a broad agenda, striking a deal that ad- from the rest of the world will necessarily
mercial landscape. dresses these challenges convincingly will either export less or return to running large
There are five broad categories of com- not be easy. overall trade surpluses – and a further in-
plaints that have substantive merit. China isn’t likely to accept all calls for crease in China’s surplus in manufacturing
1. Chinese tariffs are generally a lot change, and the Trump administration hasn’t seems politically untenable. Consequently,
higher than those in Europe or the U.S. articulated its real bottom line. It is conse- it is hard to imagine that China can succeed
Such differences are built into the terms quently important for the United States to in its industrial policy ambitions without fun-
of China’s WTO accession, but they still assess the trade-offs between its various ne- damentally changing its current economic
raise questions of fairness given China’s gotiating goals in a hard-headed way. relationships with the rest of the world –
size. The easiest path to a successful negotia- with important consequences for American
2. China restricts inward investment, tion would be for the United States to accept businesses operating in China. I
and often requires inward investment, a reduction in China’s tariffs and barriers to in-
formally or informally, to be done using vestment, without any real change in China’s
Conceived in America
a joint venture with a Chinese company. domestic subsidies or its buy China prefer-
The Chinese company in turn can nego- ences. Such a deal would no doubt provide
tiate with its foreign partner to transfer incremental progress, but it would likely be
technology to the joint venture as part insufficient to put the broader economic re-
of the commercial negotiations over lationship on a truly sustainable basis.
deal terms. And while a unilateral reduction in
January / February 2019
3. China provides massive subsidies to China’s tariffs would be a step in the right
favored industries. No other country direction, it is hard to understand why the
provides access to so much bank fund- world’s most successful exporter of manu-
ing for big catch-up projects. In some factures still needs special protection. With
sectors – like semiconductors – there the yuan back at its 2008 level against the
are now multiple state-backed invest- dollar, reducing tariffs on its own probably
ment funds aiming to create (or buy) a wouldn’t be enough to prompt U.S. firms to
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