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Can Trump Climb China’s Great Trade Wall?

The tense trade negotiations between U.S. and China have caused uncertainty in farm country over the last three months. Will President Donald Trump be able to secure more favorable trade terms for the U.S.? Or will the negotiations end in a trade war where farmers lose their largest soybean customer? China purchases every third row of U.S. soybeans and is also a large purchaser of ethanol by-products as well as other ag products.

While it’s impossible to predict the outcome of the negotiations, to understand why they are happening requires understanding China’s motivations and goals, says Mark Duval, the immediate past president of the American Chamber of Commerce in China.

‘Very One-Sided and Unfair Relationship’

In November 2017, before the U.S. and China began throwing tariffs back and forth across the Pacific Ocean, Trump met with Chinese President Xi Jinping in Beijing. During that visit, Trump laid out clearly his perspective on U.S.-China trade relations.

“Trade between China and the United States has not been, over the last many, many years, a very fair one for us,” Trump said.

“Right now, unfortunately, it is a very one-sided and unfair [relationship]. But – but – I don’t blame China. After all, who can blame a country for taking advantage of another country for the benefit of its own citizens? I give China great credit,” he continued as the crowd of business leaders and journalists gasped at his frankness.

“But in actuality I do blame past [U.S.] administrations for allowing this out-of-control trade deficit to take place and to grow. We have to fix this because it just doesn’t work … it is just not sustainable.”

Duval was one of the business leaders in attendance at the event. “Trade hawks believe China has been abusing trade mechanisms and ripping off America,” says Duval. “They believe we have been at war with China on trade, but only China has been at war because not everyone else has been paying attention.”

Duval is an American citizen who has been based in China since 1996, previously working at Motorola China before serving as the president of the American Chamber of Commerce in the People’s Republic of China. At the chamber of commerce, he led advocacy with U.S. and Chinese government officials and acted as a media spokesperson for the American business community in China. In other words, Duval has closely watched U.S. and China’s trade relations and patterns for more than 20 years. He spoke recently at Alltech’s ONE18 conference, sharing his insights into China’s aspirations and methods as well as Trump’s negotiating tactics.

15-Year Plan for Science and Technology

Through 2005, “there was a sense that China was changing and moving toward a Western open market economy,” says Duval.

In 2001, China joined the World Trade Organization, bringing major growth to China’s international trade. In 1995, China’s foreign trade totaled $289 billion, according to numbers released by the Chinese government. By 2005, that number grew 384% to $1.4 trillion, putting China in third place for the world’s largest trading nation behind the U.S. and Germany.

In 2006, on the heels of that record-setting trade year, China released a 15-year Medium- to Long-Term Plan for the Development of Science and Technology (MLP).

“China has been backing up completely after MLP was announced,” says Duval.

The MLP is a top-down national strategy that requires the mobilization and participation of all sectors of society, explains Duval. The plan identifies 11 key sectors and 69 priority areas for development. Two primary goals that affect trade are import substitution and the promotion of Chinese enterprises. The MLP calls for import substitution to be achieved by leveraging state resources and regulatory systems. The goal for Chinese-owned businesses is to become dominant in the domestic market and competitive internationally in key industries.

“Trade hawks would argue that those policies accelerated the existing trade deficit and resulted in where we are today,” says Duval.

Made in China 2025

“The next policy that caused great alarm was Made in China 2025,” says Duval.

Released in 2015, this blueprint explains China’s next evolution. “This is about China moving up the value chain in industries, moving away from being the world’s factory,” Duval explains. “The production associated with existing industries is low value add, heavily polluting, and not the economies of the future.

“China plans to move up the value chain and compete in more advanced areas. China will throw hundreds of billions at this in the years to come,” he adds. The areas include high-tech industries like robotics, aviation, and advanced information technology.

The problem with this approach, explains Duval, is not the aspiration but rather the tools and methodology employed by China. “China is nationalizing key industries and forcing foreign players out after stealing their technology.”

Protecting U.S. technology has been a central part of trade negotiations with Chinese telecom gear maker ZTE Corp at the center of the debate.

In April, the U.S. implemented a seven-year ban prohibiting American companies from selling parts to ZTE. For the last two weeks, the Trump administration has been considering removing or lessening the ban in exchange for China eliminating tariffs on agriculture products.

Lawmakers have been vocal in their disagreement with Trump on the easement of restrictions on ZTE. “I hope the administration does not move forward on this supposed deal I keep reading about,” Republican Senator Marco Rubio said. “They are basically conducting an all-out assault to steal what we’ve already developed and use it as the baseline for their development, so they can supplant us as the leader in the most important technologies of the 21st century.”

President Xi Jinping’s Priorities

While Trump works to maintain the balance between protecting U.S. technology and avoiding harsh tariffs, President Xi Jinping has three main priorities and a timeline guiding his moves, says Duval.

His first priority is the Communist Party of China. The second is the China dream – the great rejuvenation of the Chinese nation. Last, he wants to find ways to overcome impending crises in China, including corruption, environmental degradation, resource scarcity, food safety, and public health.

The timeline laid out by Xi extends to 2050 with development goals in 2020 and 2035:

  • 2020: Fully establish a moderately prosperous society.
  • 2035: China is a global leader in innovation. While the middle class expands, the quality of life will improve as well as the environment.
  • 2050: China is a leading global power. There will be basic prosperity, ensuring all Chinese people can live happy, safe, and healthy lives.

“Their (China’s) structural trajectory won’t change,” says Duval, “but their structural trajectory is what is causing the issue with the U.S.”

Trump’s Strategy

Past U.S. presidents have been reluctant to challenge China and fight the methodology that is being used, says Duval. “(President George W.) Bush kicked the can down the road because he believed China would change. (President Barack) Obama kicked the can because he wanted China’s help on climate change,” he explains. “Now it seems that President Trump needs China’s support in North Korea, so there we go again.”

The Chinese government, according to Duval, views Trump as a paper tiger, believing that they have the leverage. “They are convinced that China is on the rise while the West is in disarray and decline.”

Trump has also been creating leverage over the last six months by imposing tariffs on Chinese products, including 25% tariffs on steel and aluminum and threatened tariffs on $50 billion worth of Chinese imports.

“To be clear, I don’t like the man (Trump), but I think he has been brilliant in his Chinese strategy. The Chinese will only change if you force them to change,” says Duval.

However, he is still uncertain about what will happen next. “The good news is we aren’t in a trade war. The bad news is we don’t know how to work through the main issues.”

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