China announces further opening up as hawkish Trump balks

By Sara Hsu

As the US increases protectionism, China is opening up to foreign investment.  The National Development and Reform Commission (NDRC) has stated that it will produce a new negative list on national foreign investment with a lower number of restrictions. China has also announced that it will phase out ownership limits for foreign firms producing automobiles, ships, and aircraft. The US reacted with skepticism in line with the hawkish attitude of the Trump administration. How can China respond to this?

Visitors are seen at the International Automobile Expo in Hangzhou, capital of east China's Zhejiang Province, Oct. 12, 2017.[Photo: Xinhua]

China announces further opening up

The NDRC stated that areas that will be opened up over time include finance, automobiles, infrastructure, energy, professional services, resources, and transportation. The new negative list will include a schedule for these opening up measures to take place. Although opening measures in the financial sector were previously announced, People’s Bank of China Governor Yi Gang promised that foreign firms would be allowed to compete on a level playing field with domestic firms in this industry.

Furthermore, this year, China will end shareholding limits on new energy vehicle producers, on firms manufacturing aircraft, and on firms that design and produce ships, and by 2020 will end such limits on commercial vehicles. By 2022, China will lift restrictions on passenger cars. At present, foreign car makers may own up to 50% of joint ventures with Chinese firms. The announcement of reduction in foreign ownership limits resulted in share declines for Chinese domestic firms in these industries.

US response to China's promised liberalization

The US responded to both moves by expressing wariness that China will keep its promises. Some view the promises as empty commitments that will take place sometime far in the future. In addition, a few experts have pointed out that Chinese state firms dominate these industries, and, it is believed they are likely to continue to do so. 

China’s positive declaration was made against a backdrop of increasing trade tensions between the US and China, and it appears that China’s pronouncement of these liberalization measures was intended to defuse some of the friction. This was not the outcome, as the Xi and Trump administrations seem to be miles apart in their view of US-China trade and investment relations.  Xi views China’s intended opening up measures as a signal of goodwill, while Trump views them as insufficient.

The Trump administration has been far more outwardly hawkish on China than previous administrations, so while Trump’s failure to accept China’s liberalization moves as key concessions in the trade war may be disappointing to some, it should not come as any surprise. Trump’s campaign rhetoric, which painted China as an economic enemy of the US that threatened American jobs and trade, along with his administration’s labeling of China as a strategic competitor and even a national security threat, point to an aggressive stance toward China. The imposed and impending tariffs carry that aggressive stance into action.

How China can respond

China is moving in the right direction, with its slated liberalization measures. At this point, it appears that there is little China can do to convince the Trump administration that it is not its economic enemy. The only way for China to make progress with the U.S. is to engage U.S. officials in negotiation, which China has been attempting to do. There are conversations that need to be held about the U.S.-China trade deficit and alleged intellectual property theft.

China may concede further liberalization measures if possible in order to reduce the U.S. trade deficit with China, although economically this is unnecessary. This is because trade is not a zero sum game but rather results in a win-win outcome. The point on the U.S.-China trade deficit involves a misunderstanding of economics by the Trump administration. A number of economists have pointed this out.

However, the intellectual property issue presents a real conflict.  The U.S. Trade Representative found that Chinese intellectual property theft has cost the U.S. between $225 and $600 billion per year. Alleged forced technology transfers from U.S. firms to Chinese firms in joint ventures are a key sticking point.

In an attempt to address this issue, China last year embarked upon a campaign coordinated among twelve government agencies to protect the intellectual property rights of foreign firms, targeting infringement of online intellectual property rights, patent rights, and plant variety rights. China has also stepped up its judicial protection of intellectual property rights of both foreign and domestic firms. 

Further discussion between top American and Chinese officials is necessary to resolve these issues. At least, the Trump administration needs to recognize that China is attempting to make concessions in this otherwise nasty trade war and engage more constructively in talks. For its part, China needs to address the intellectual property rights allegation more completely in order to assuage the fears of American firms. Only through negotiation, not aggression, can these issues be resolved. Open discussion is not something that the hawkish Trump administration should balk at.

(Sara Hsu, associate professor, the State University of New York at New Paltz)