Donald Trump is right: China must play by the rules
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Donald Trump is right. It is not every day you will read those words in the Financial Times, but the US president is correct when he says China does not play by the same trade and investment rules as the west.
He is also right to point out that past attempts to deal with this imbalance have not worked. That is the consensus among most countries and foreign businesses operating in China, even though they have been unwilling to complain too loudly for fear of being shut out of the Chinese market.
This is starting to change. Faced with an increasingly hostile operating environment in China and growing competition from Chinese counterparts abroad, many large companies are now asking their politicians to get tough on Beijing.
China’s average import tariffs are around double those of the US and UK. But it has also erected numerous non-tariff trade barriers that exclude whole industries or countries, often for explicitly political reasons. When, for example, the dissident Liu Xiaobo won a Nobel Peace Prize in 2010, unofficial Chinese customs investigations into imports of Norwegian salmon effectively shut off the trade for years.
After South Korea agreed in 2016 to host a US missile defence system that China considered a threat, Chinese purchases of Korean cars, cosmetics and pop music collapsed, Chinese tour groups to South Korea were blocked and dozens of Korean supermarkets were closed for “fire safety violations”.
In these and many other examples, the Chinese government issued orders directly to companies and regulators while denying any change of policy.
The services of Google, Facebook, Twitter, YouTube and Instagram are all blocked by China’s internet censorship regime. This is ostensibly because public criticism of China’s political system or its leaders is a breach of national security and these companies cannot guarantee it will not happen on their platforms. But their absence has conveniently fostered the rise of homegrown groups such as Tencent and Alibaba.
When it comes to restrictions on investment, the field is tilted even more in favour of Chinese companies. Of the 17 largest Chinese takeovers of European companies carried out between 2000 and 2017, only a quarter could have happened in the other direction because of Chinese laws and industrial policies, according to a report published last week by Rhodium Group and the Mercator Institute for China Studies (Merics), a Berlin-based think-tank.
“Chinese investors enjoy one of the most open investment regimes in Europe, with almost unfettered access to all industries,” the report found. “China on the other hand continues to strategically limit access for foreign companies in many sectors and there is rampant informal discrimination against foreign firms.”
This imbalance was not a concern until very recently because China’s companies hardly invested outside its borders. In 2008, annual Chinese direct investment in the 28 EU countries was barely €700m. But it hit €30bn in 2017, exceeding direct European investment in China in the same year by a factor of four. And by the end of last year, the cumulative stock of Chinese direct investment in Europe since 2000 had caught up with Europe’s total stock of foreign direct investment in China, according to the Merics report.
This pattern is playing out across the developed world. Foreign companies are particularly concerned about Beijing’s habit of forcing them to transfer core technologies to domestic competitors in exchange for access to China’s vast market.
Chinese officials claim this is not official policy but the practice is rampant and implicit in the government’s “Made in China 2025” industrial plan, as well as cyber security laws that require companies to share key technologies with agencies that carried out covert intellectual property theft for decades.
Mr Trump has been astute in targeting forced technology transfer and Beijing’s attempts to shut out foreign competition from industries it hopes to dominate globally. But he is seriously mistaken in his apparent belief that he can win a trade war on multiple fronts by simultaneously attacking some of America’s closest partners.
Germany, in particular, is a natural ally since it is such a huge exporter of high-tech products to China and, until recently, it did not even have a mechanism that allowed it to block foreign investments on the grounds of national security.
Angela Merkel, German chancellor, is due to visit the White House on Friday and will then travel to Beijing next month. Mr Trump has the chance to recruit Ms Merkel to his cause, but he could just as easily alienate her and thus badly undermine his efforts to level the playing field for foreign companies in China.
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