If President Donald Trump had slapped punitive tariffs on all Chinese exports to America, as he had promised during his campaign for office, he would have started a trade war. Fortunately the president hesitated, partly because he wants China’s help in thwarting North Korea’s nuclear ambitions.
That is not the end of the story, however. Tensions over China’s industrial might now threaten the architecture of the global economy.
In mid-September America’s trade representative called China an “unprecedented” threat that cannot be tamed by existing trade rules. The European Union, worried by a spate of Chinese acquisitions, is drafting stricter rules on foreign investment. All the while, China’s strategy for modernizing its economy is adding further strain.
At the heart of these tensions is one simple, overwhelming fact: Companies around the world face ever-more-intense competition from their Chinese rivals. China is not the first country to industrialize, but none has ever made the leap so rapidly and on such a monumental scale. Little more than a decade ago, Chinese boom towns churned out socks and cigarette lighters. Today the country is at the global frontier of new technology in everything from mobile payments to driverless cars.
Even as China’s achievements inspire awe, there is growing concern that the world will be dominated by an economy that does not play fair. Businesses feel threatened. Governments that have seen Brexit and the election of Trump worry about the effects of job losses and shrinking technological leadership.
If the outcome is to be good, however, they must all think clearly about the real nature of China’s challenge.
Undoubtedly China doesn’t play entirely as its competitors would like. It kept its currency cheap for years, boosting exporters. It finances its state-owned giants with cheap credit. Its cyber-spies steal secrets.
Nonetheless, depictions of corporate China as nothing more than an undemocratic, state-run monster, thieving and cheating to get ahead, are crude and out of date. Home-grown innovation is flourishing. The innovators are mainly private, not the many heads of a single creature called China Inc.
To separate hype from reality, think of Chinese competition as having three dimensions: illegal, intense and unfair. Each needs a different response.
First, consider illegality. The best example is the blatant theft of intellectual property that makes for the most sensational headlines, such as the 2014 charges brought against five Chinese military officers for hacking into American nuclear, solar and metals companies.
The good news is that such crimes are declining. A 2015 agreement with America seemingly led to a marked drop in Chinese hacks of foreign companies and, as Chinese companies produce more of value, they are themselves demanding better intellectual-property protection at home.
The second dimension—intense but legal competition—is far more important. Chinese companies have proven that they can make good products for less. Consumer prices for televisions, adjusted for quality, fell by more than 90% in the 15 years after China joined the World Trade Organization. China’s share of global exports has risen to 14%, the highest any country has reached since America in 1968.
That may fall as China loses its grip on low-value industries such as textiles, but it is gaining a new reputation in high tech. If data is the new oil, China’s tech industry has vast reserves in the information generated by the hundreds of millions of its people online, who are unprotected by privacy rules. Whether you make cars in Germany, semiconductors in America or robots in Japan, the chances are that in the future some of your fiercest rivals will be Chinese.
Last, and hardest to deal with, is unfair competition: sharp practice that breaks no global rules. The Chinese government demands that companies give away technology as the cost of admission to China’s vast market. Foreign companies have been targeted in the biggest of China’s anti-monopoly cases. The government restricts access to lucrative sectors, while financing assaults on those same industries abroad. Such behavior is dangerous precisely because today’s rules offer no redress.
Sorting Chinese competition into these categories helps calibrate the response. Blatant illegality is the most straightforward. Governments must prosecute and seek redress, whether through the courts or through the WTO. Companies can do better in protecting themselves against cyber-thieves, from China and elsewhere.
Though it is politically hard, the best response to intense competition is to welcome it. Consumers will gain from lower costs and faster innovation. Misguided attempts to hold back the tide would not only lose those potential gains, but also might blow up the world trading system, with catastrophic results.
Rather than try to stop the loss of jobs, governments should provide retraining and a decent safety net. Both companies and governments need to spend more on education and research. Six years ago President Barack Obama said that America faced a new “Sputnik moment” in China’s rise. Since then not much extra has been devoted to research, training or infrastructure.
The hardest category is competition that is unfair, but not illegal. One approach is to coax China into behaving better by acting collectively. America, Europe and big Asian countries could jointly publish information about economic harm from China’s policies—as they did by sharing details about overcapacity in the steel industry, nudging China into cutting its excesses. They should demand reciprocity, requiring China to give foreign companies the same access that its own companies enjoy in their markets.
© 2017 Economist Newspaper Ltd., London (September 23). All rights reserved. Reprinted with permission.
Image credits: Stephen Crowley/The New York Times