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Realistic Steps to Get US-China Trade Back on Track

Sept. 11, 2017

Dominic Ng, Chairman and CEO of East West Bank, talks about steps to get US-China trade back on track
Dominic Ng, Chairman and CEO of East West Bank, outlines six steps that both countries can take now to prevent a US-China trade war

East West Bank CEO Dominic Ng outlines common sense steps both countries need to take now.

(This is the last editorial of a three-part series on the myths and misunderstandings of the U.S.-China trade relationship.)

We stand at a crossroads. The U.S. and China can either enter a costly and damaging trade war, or they can negotiate a better alternative. Getting trade relations back on track does not mean resolving every point of tension; there are fundamental areas where both nations will likely never agree. Other issues will require complex legislative changes or multilateral negotiations to resolve, but there are also areas of mutual interest where progress can be made quickly.

In recent years, high-level interventions cleared the way for U.S. credit card companies, U.S. beef and biotech soybeans to enter the Chinese market. Meanwhile, the U.S. agreed to lift an existing ban on Chinese poultry imports. Similar progress is possible in the future if both sides can focus on strategic areas to make beneficial terms. Here are my recommendations for realistic steps our leaders can take now to reverse the downward spiral and rebuild trust.

Step 1: Start with the right numbers

First we need to get the numbers right. Politicians need to understand and utilize more nuanced data in their dialogue with China instead of blindly relying on outdated, politically opportune figures. The iPhone alone added an estimated $17 billion to China’s trade balance with the U.S. in 2016. However, as I talked about in my first editorial of this series, Chinese inputs actually account for only 5 percent of the total iPhone value.

These distorted figures must be fixed immediately. Commerce Secretary Wilbur Ross is a savvy investor and would never make decisions based on erroneous figures. Why should he settle for anything other than the most accurate financial information now that he is in government making critical decisions affecting every business in this country? Distorted data has become a big liability and cannot be ignored any longer. We must have correct accounting.

Over the next 90 days, I urge Ross to order a reexamination of the methods used by Commerce Department’s Bureau for Economic Analysis to calculate trade figures. An independent task force should review the current statistical toolbox and recommend changes to bring trade figures more in line with reality. Value-added trade data compiled by the Organization for Economic Cooperation and Development is a useful starting point. It is crucial that policymakers have a true picture of the trade deficit’s size and components, if they are to address its real issues in a skillful way.

Step 2: Reduce trade barriers by focusing on low-hanging fruits

To generate goodwill through immediate results, China’s leaders should consider moving fast in areas where it has already signaled its intent to liberalize and allow more domestic competition.

Movies and entertainment services are one example. The summer blockbuster “Wolf Warrior 2” broke China’s box office record and became the second film in history to pass the $800 million mark in a single territory, just behind 2015’s “Star Wars: The Force Awakens.” This shows that Chinese movie makers are now finally able to pull their own weight domestically and ready to compete against American films. Now is a good time to increase China’s annual foreign screening quota to produce quick results.

Agricultural goods and biotechnology are two other areas high up on the U.S. priority list. Accelerating approvals for seed products grown in the U.S. would be a powerful signal of China’s commitment to a transparent and efficient regulatory approval process. Similarly, continuing to streamline the approval process for pharmaceuticals would go a long way. In March, China announced it would allow foreign companies to file for new drug approvals using data from international, multicenter trials, so long as those trials include China as a study site. This is a significant step forward, and I recommend China adopt the proposed rules as soon as possible to give the Chinese people access to the most advanced drugs and therapies.

Close up of empty seats in a movie theatre
(Photo credit): Gettyimages.com/David Saium/EyeEm
"Chinese movie makers are now finally able to pull their own weight domestically and ready to compete against American films. Now is a good time to increase China’s annual foreign screening quota to produce quick results."

- Dominic Ng

In the United States, the Trump administration should continue and accelerate reforms of the U.S. export controls regime. As I discussed in my previous editorial, China is now the fastest-growing market for many high-tech products, but the U.S. export controls regime has long put American exporters at a disadvantage. Designed in the 1970s, the system imposes onerous licensing requirements for innocuous products such as aircraft toilets, brakes and bolts.

The Obama administration has made good progress in recent years to reform the U.S. export controls regime. I urge the Trump administration to continue this path instead of putting up additional barriers. An inter-agency task force should work with Congress and industry to implement the next steps of reform: creating a single list of controlled items, creating a singular federal agency, and mandating regular reviews of controlled items to keep up with technological change. Such reforms would help ensure that U.S. companies stay competitive with their counterparts in other Western countries and export non-sensitive high-tech products to China without harming security interests.

Step 3: Find non-tariff solutions to limit Chinese overcapacity impacts

Overcapacity in steel and other manufacturing sectors contribute to China’s trade surpluses with the U.S. and other countries, as Chinese producers offload excess inventories abroad. It is in China’s self-interest to address this misallocation of resources. For the transition period, we should not react with tariffs but work with China to find solutions that limit the negative impacts on the U.S.

Steel is the most prominent example. China directly supplies only about 1 percent of the steel used in the U.S., so a tariff would do nothing to balance trade with China. Instead, it would raise prices for U.S. consumers, and China will likely respond by slapping tariffs on U.S. products. I pose this question to the administration: does it make sense to hurt numerous U.S. companies that use steel to make their products, as well as other allies like Canada and Mexico who export much more steel to the U.S., over a 1 percent issue?

Instead of slapping tariffs on Chinese goods, the U.S. should work with China to explore cooperative alternatives, like voluntary export restrictions. In 1981, Japan agreed to limit the exports of passenger cars to the U.S. to 1.68 million units per year until 1984, and unilaterally imposed similar restrictions in following years. These quotas gave U.S. automakers room to regain market share while encouraging Japanese manufacturers to move some production to the United States. The measures helped to avoid a trade war and restore support for free trade among citizens and businesses.

I believe this instrument could achieve the same results today. Unfortunately, President Donald Trump twice rejected Chinese proposals to cut steel overcapacity by 150 metric tons by 2022, even though it was endorsed by Secretary Ross and other top advisors. The President should re-consider his decision. Verifiable capacity cuts and voluntary export restrictions would be a good deal for America.

"China directly supplies only about 1 percent of the steel used in the U.S., so a tariff would do nothing to balance trade with China."

- Dominic Ng

Inside the steel mill
(Photo credit): Gettyimages.com/ViewStock

I also urge China to move forward with the effort anyway, and go even further to cut overcapacity across other heavy industries, such as cement and aluminum. It is in China’s own interest to cut down overcapacity for the good of its people. Polluting heavy industries continue to siphon capital away from more productive domestic sectors, and are taking a heavy toll on the environment and health of the Chinese people. Air pollution causes 7 million premature deaths every year, 20 percent of China’s agricultural soil is polluted, and 60 percent of underground water cannot be consumed unprocessed. This is not sustainable.

China should more frequently allow companies in these industries to exit the market. Chinese courts accepted 5,665 bankruptcy cases in 2016, an increase of 54 percent from the year before, and that number should further increase. China should also allow consolidation through mergers and acquisitions, including foreign takeovers. Finally, China needs to further promote the central Ministry of Environmental Protection so it can take a greater role in the enforcement of environmental compliance rules. From January to July 2017, the Ministry issued fines of $116 million—that’s an increase from previous year, but too small for a $12 trillion economy with severe environmental problems.

Step 4: Protect technology and intellectual property rights

The protection of intellectual property rights (IPR) has been a long-standing issue in the U.S.-China trade relationship, and recent steps by the Trump administration to launch a section 301 investigation have further escalated tensions.

China needs to take steps to more aggressively enforce IPR in the coming years because it is in China’s own interest to do so. China is no longer the world’s lowest-cost producer, so its companies increasingly need to build technologies and brands to thrive. Instead of making low-cost, no-name socks for Walmart, Zhejiang textile producers will soon need to sell premium socks under their own brands to U.S. consumers.

If change is not made quickly, Chinese technology leaders with global ambitions like cell phone maker Huawei and the big three technology companies, BAT—Baidu, Alibaba and Tencent—will be forced to take their IP elsewhere to sustain technological edge, for fear of theft in their own country. China’s exploding venture capital scene is now bigger than the United States’, hitting an all-time high of $31 billion last year. Investors are pouring money into robotics, artificial intelligence and big data, as well as education, fintech and healthcare-related startups. Two-thirds of the world’s hardware unicorns come from China. All this valuable IP is at risk if China does not act aggressively now to shore up the laws and crack down on enforcement to ensure that new ideas will be protected.

As immediate steps, China should expand its IPR court system nationwide, which has brought measurable improvement for foreign companies in pilot cities. China should also initiate a task force to explore how administrative enforcement of IPR rulings can be improved, especially against vested interests that often shield local companies from IPR-related sanctions. Finally, Beijing should double down on new technologies, such as real-name online registrations, or its new Social Credit system, to support the prosecution of copyright violators and their customers.

Step 5: Keep investments flowing

Foreign direct investment (FDI) is intimately tied to trade flows, and businesses have a lot of appetite to increase investments both ways. Our leaders should immediately return to the negotiating table and conclude a bilateral investment treaty (BIT), which would set clear rules for market access limited only by short negative lists of restricted sectors. In the meantime, both sides should take concrete steps to foster positive momentum to counter fear over security and economic risks.

China recognizes that it must accelerate the liberalization of its FDI regime to sustain investments from U.S. and other partners. In the past two years, China has significantly overhauled its inward FDI regime by replacing its three lists with a nation-wide negative list, which names the specific types of investments that are restricted or prohibited. An updated version of China’s Foreign Investment Catalogue went into effect on July 28. However, it only marginally increases market access for U.S. companies. To demonstrate seriousness, China should consider unilaterally removing barriers in sectors that are important for the U.S.

The United States must do its part to clarify its own negative list of off-limit sectors and not further complicate its investment screening process. Under the new U.S. administration, the Committee on Foreign Investment in the United States (CFIUS) has become problematically slow and unpredictable. Treasury Secretary Steve Mnuchin needs to ensure that CFIUS remains consistent and efficient, and avoid politicizing the process. The President can help by filling relevant senior government posts that remain vacant, including the undersecretary responsible for investment.

Through Select USA, the U.S. should double down on efforts to bring in Chinese greenfield manufacturing facilities to the U.S., which will create new jobs, tax revenue and other benefits for local communities. South Carolina landed three major Chinese greenfield plants in recent years: Geely-owned Volvo is building a $500 million auto factory that will employ more than 2,000 workers; Jushi Group is building a $300 million fiberglass plant that will create 400 jobs; and Giti Tire has built a manufacturing facility and distribution center on a 1,100 acre site and will create 1,700 new jobs.

Step 6: Build up “U.S. belt and American road” with Chinese capital

The chaos that Hurricane Harvey wreaked upon Houston is the latest wakeup call that America’s infrastructure needs to be upgraded. The city’s inadequate stormwater drainage system, and aging pipes and dams were no match for the deluge, causing deaths and widespread damage. We urgently need to repair the nation’s crumbling roads, bridges, and dams, and the administration should make the financing of large infrastructure projects a top priority.

Chinese capital deployment can help. Chinese foreign exchange reserves are still sizable, and institutional investors such as the National Social Security Fund are looking for opportunities to diversify their portfolios. Moreover, Chinese firms have plenty of experience and know-how in global infrastructure construction projects, including high-speed rails, utilities and airports. Federal and local U.S. officials should explore public-private partnerships and other models that allow Chinese funding to build infrastructure and provide jobs, training, and opportunities for American workers for years to come.

While I think it’s a sound strategy for China to be focusing on building a modern-day Silk Road in Asia, China should remember that there’s no more important “Belt and Road” than that of the “U.S. Belt and American Road.” China and the U.S. are intimately tied to each other through $650 billion of annual trade and $60 billion of two-way FDI flows—what better to invest in than the most strategic trading and investment partner, and create goodwill in U.S. communities? Moreover, China is trying to curb “irrational” and risky overseas investment. Infrastructure projects that are supported by the U.S. government are a great fit for Chinese investors seeking high-quality projects that offer low risk and stable returns.

In conclusion, the U.S. and China must make the choice to avoid a trade war and seek out low-hanging fruit to pick together. While it will take time to iron out serious differences, there are several areas where tangible gains can be accomplished in the short-term. We cannot afford a global protectionist downward spiral. Let’s rebuild trust and put the U.S. and China back on track toward a productive relationship that will benefit the people of both countries.

Dominic Ng will speak on this topic at the Los Angeles World Affairs Council’s 2017 Future of Asia Conference on September 15th.

Read more of Dominic’s Take on U.S.-China business

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