The only good thing about the US-China trade relationship in 2012 is that the year is almost over.
Business relations between US and China took a serious turn for the worse in 2012. I’m not talking about tension over foreign exchange rates (a silly policy initiative ineptly executed) –or the China-bashing of the US Presidential campaigns (China’s position as perennial bad-guy during elections is practically an endearing tradition). I am looking at three big, long-term developments that threaten to undermine the foundation of US-Chinese commerce that flared up in 2012.
Ongoing friction points in US-China trade relations:
- Accounting rules and the free flow of financial data. (the State Secret problem)
- Indigenous innovation policy and IP protection
- Protectionism in the form of unfair regulations, bureaucracy or the politicization of the court system.
2012 was a watershed year for US-China commerce
Doing business in China hasn’t been this difficult or expensive for Westerners since Deng Xiaoping started reforming the PRC economy in 1978. If the current trajectory continues it’s likely that most of your future dealings with China will happen within Western jurisdictions in the form of China outbound investment, or through intermediaries such as Taiwan or Singapore. The problem isn’t that there has been hostility or conflict, but rather that there is a clash of institutional imperatives and basic goals between the bureaucracies of China and the West. This is most clearly visible in the ongoing stand-off between the U.S. Securities & Exchange Commission (SEC) and the China Securities Regulatory Commission (CSRC) – which seems to have hit the roadblock that US and Chinese laws are in direct opposition. Chinese firms have already started to withdraw from US authority (see the article about Focus Media’s privatization).
If the controversy over auditing financial statements was an isolated case, one could still make a reasonable case for the globalist view – but unfortunately the bedrock positions and values of US and Chinese policy organs seem to be at odds. The view in the West is that China is gaming the system – using a combination of direct measures and informal coercion (the OTHER soft power) to create or reinforce unfair trade rules. China, on the other hand, asserts that the US in particular and Western nations in general are conspiring to contain and stifle China’s sovereign rights. While the differences are not yet insurmountable, it will take serious effort and determination to put trade relations on a positive footing.
The U.S.-China Joint Commission on Commerce and Trade (JCCT) which has just wound up in Washington illustrates the two paths that commercial relations may take over the next year. The issues and solutions discussed lacked substance, weight and relevance. The most worrisome outcome of the talks is that representatives from both sides said such positive things – pledging cooperation and mutual benefit. The negotiators at the meeting were high level, but they still lack the power to alter the position of either side.
Two Paths for 2013 and beyond.
If we stay the course we are on, then the most we can hope for is a tissue of civility and cordiality over a series of conflicts and tension leading to a long and debilitating institutional rift between China and the West. It won’t be hostility or even nationalism, but rather a resignation to the incompatibility of our basic systems. Even as diplomats speak about the two economies as inseparable and declare that progress is being made, there are signs that our systems are uncoupling and segregating in very concrete ways (restrictive visa rules, increased use of WTO suits, the refusal to allow the free exchange of financial data).
International exercises like the Joint Commissions and WTO deliberations may be nothing more than a “dead cat bounce” . (An inelegant but colorfully descriptive term from the world of finance. It indicates that a long term downward trend still exists even if there are momentary positive indicators. If a cat dies and rolls off a high roof, it will be bounce a bit when it hits the ground – but that doesn’t mean it’s really recovered.) The US and China make convenient allies, but in many ways are still natural enemies. Frenemies can work together in the short term if the situation requires it, but it is an unstable relationship that usually degenerates into out and out conflict.
On the other hand, it is possible that Beijing and Washington (or Shanghai and NY, for the conspiracy theorists) are reading the same data-points and determining that a G2 world is better than a G0 one. There is still an opportunity for the US and China to come to a long-term accommodation that allows international institutions to function and international trade to develop. It may not be fast or dramatic, but in the coming months we will get a sense of the direction where trade relations are heading. The international trading system that broke down in the 2008 financial crash may be replaced with something new and durable. But if a phoenix is going to rise from the ashes of the old system, it will take deliberate and considered leadership from both sides.
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