The Taiwan Banker

During the course of the 2016 U.S. presidential campaign, Donald Trump harshly criticized China's unfair trade practices, emphasizing the harm that they did to the US economy and workforce. Trump said that if he won the presidency, he would take measures to curb China's trade abuses.Once Trump took office, however, he quickly shifted gears. In April, Trump met with Chinese President Xi Jinping and soon thereafter said that US-China trade required more communication and discussion. There are practical reasons that Trump has not taken any serious punitive action against China on trade. For one thing, most U.S. China experts oppose a trade war between the two countries for obvious reasons: It would not only hurt China, it would harm both the U.S. and global economies too. And to be sure, U.S. states with heavy exposure to China would suffer - some states that voted for Trump in the recent election. The U.S. is a major exporter of soybeans and aircraft to China. We can imagine what may happen to the states where those industries are based if they lose one of their biggest export markets.A U.S.-China trade war would also be detrimental to Asian countries that have close ties to America, such as Japan and South Korea. Trump's former White House Chief of Staff Steve Bannon was the strongest voice pushing for a hard-line approach to China, but he was ultimately sidelined by more moderate forces, such as the president's son-in-law Jared Kushner and his daughter Ivanka.Interestingly, while the anti-globalist Bannon left the White House in August, Trump nevertheless ordered the US Trade Representative to open an investigation into China's alleged abuse of U.S. intellectual property. The probe will examine how China has unfairly obtained US intellectual property (particularly technology) and make recommendations for appropriate action.Rising uncertainty in U.S.-China tradeWithin a week, U.S. Trade Representative Robert Lighthizer announced that that Washington would open a formal probe into Beijing's alleged theft of U.S. intellectual property under Section 301 of the U.S. Trade Act of 1974. The investigation could run from several months to a year in length. If it concludes that China has pilfered U.S. intellectual property, President Trump will be authorized to take direct punitive action against China to prevent further such violations. Action could include restrictions on imports from China, charges for services or other restrictions. Consequently, in the coming months, U.S.-China trade will be surrounded by more uncertainty than in the recent past.After the United States announced it would probe China's alleged intellectual property theft, Beijing reacted strongly, emphasizing that should the U.S. take punitive action it would have serious negative impact on the bilateral trade relationship. It is easy to see why China reacted as it did, but interestingly, some in the U.S. think tank community also spoke out against the use of Article 301.Chad Bown, a researcher at the Peterson Institute for International Economics, says that Article 301 is a "rogue measure." Bown notes that Congress passed the law in 1974 in the context of the Cold War; there was not at the time an adequate alternative for addressing trade disputes. However, today, the World Trade Organization (WTO) has a comprehensive system in place for managing trade disputes. In Bown's view, if the U.S. were to use domestic trade law to unilaterally implement economic sanctions against China, it would not only fail to resolve the dispute between the two countries, but also harm Sino-US economic ties and jeopardize the overall bilateral relationship.However, it is unclear if the Trump administration believes it can resolve differences with China (or other countries) through the WTO. During last year's presidential campaign, Trump repeatedly emphasized his view that the WTO treated the U.S. unfairly, harming American interests in the name of WTO-supported free-trade policies. Trump believes the WTO's reach prevents the U.S. from being able to effectively respond to unfair trade practices, notably the "one member, one vote" trade dispute resolution system.Trump said that if the WTO fails to treat the U.S. more fairly, the U.S. would not hesitate to withdraw from the organization.In the business world, those who hold the greatest shares in firms dominate their operations. Yet the biggest players are not able to dominate the WTO. Trump does not like that the WTO resolution system often works in favor of smaller countries - including those who are involved in trade disputes with the United States. He thinks that the current dispute resolution system in the WTO should be amended to be based on a market share ratio in order to protect American interests.Meanwhile, in June 2010, current U.S. Trade Representative Robert Lighthizer presented a 35-page document to the United States Congress Economic and Security Commission describing the effects of China's accession to the WTO on the U.S. economy. In this report, Lighthizer emphasized four main points. First, in order to allow China to join the WTO, in 2000 the U.S. Congress granted China permanent normal trade relations. During the debate over China joining the WTO, Congress stressed that the PRC's membership in the organization would bring significant economic benefits to the United States. Second, China has not fulfilled the commitments it made when it joined the WTO a decade ago. Third, he explained the reasons that optimistic forecasts about China's accession to the WTC were incorrect. For one thing, US policymakers failed to understand the essence of China's economy and political system. Additionally, US policymakers misjudged the eagerness of US manufacturers to offshore production to low-cost China. China's WTO accession made that economically feasible, even as those companies continued to serve the US market. Furthermore, Washington has not responded adequately to China's mercantilism; it has been too passive. Fourth, Lighthizer said that the US government should deal more proactively with the problems that have already arisen from China's entry into the WTO.Saving "Made in the USA"In that report, Lighthizer illustrated the impact of trade with China on the US economy. A hardening of U.S. attitudes toward China's trade policies was also seen when the Obama Administration rolled out the Trans-Pacific Partnership (TPP), a free-trade agreement that excluded China. Yet, during last year's U.S. presidential election campaign, the popularity of Donald Trump's protectionist stance showed how American society no longer blindly supports globalization. The negative impact of globalization on the U.S.'s manufacturing industry and its constituents has become much more apparent.In the view of Trump and his supporters, the U.S.'s economic problems over the past two decades can be attributed to the collapse of the nation's manufacturing sector. Many firms have moved production to either China or Mexico. If that can be reversed, Trump and his supporters believe the US economy can be revitalized. With this in mind, Trump has publicly berated large U.S. firms for moving production offshore - such as Ford - and encouraged foreign firms to invest in the United States. Trump's focus on bringing back manufacturing to the United States surely had a large impact on Foxconn's recent decision to build an LCD panel plant in Wisconsin.For Trump's "Made in the USA" plan to be a success in the short term, a cohesive trade policy is needed. Thus far, the Trump administration has withdrawn from the TPP, begun renegotiating the North American Free Trade Agreement (NAFTA), and mulled suspending the US-South Korea free-trade agreement. However, dealing with China on trade is less straightforward. The two countries do not have any trade agreements, and it is unrealistic for Washington to ask Beijing to withdraw from the WTO. Yet given the trade imbalance between the two countries, they need to find a way to work out their differences.According to a report about the impact of China's accession to the WTO on the U.S. economy published by the U.S. Trade Representative in March, the U.S. manufacturing trade deficit doubled from $371 billion in 2000 to $648 billion in 2016. Meanwhile, the trade deficit with China trebled from $81.9 billion in 2000 to $334 billion in 2015. Yet over that same period, median household income in the U.S. fell from $57,719 to $ 56,516 in 2015. Further, in 2000 there were 17.28 million U.S. manufacturing jobs, a figure largely unchanged from 1980. Yet the number of U.S. manufacturing jobs fell to 12.34 million by 2016. In the 16 years prior to China's WTO accession, U.S. industrial production rose by 71%, but it only increased by 9% between 2000 and 2016. These disappointing numbers show that U.S. needs a new approach to trade.Taiwanese businesspeople should strengthen intellectual property protectionThe United States launched a probe of China's trade practices in the name of protecting intellectual property rights. This investigation was not launched to safeguard traditional manufacturing. Rather, it was initiated to shake up the status quo, which is harming the interests of U.S. companies. It is difficult to predict what the results of the probe will be, but perhaps China will be forced to soften its approach to U.S. technology firms or those companies will get some other benefits.As for Taiwan, given its excessive investment in China, uncertainty in the U.S.-China trade relationship will certainly create some risks for Taiwanese firms operating across the Taiwan Strait. In the past, when U.S. multinational firms were uncertain about US government policy, they would adopt conservative strategies. Since Taiwanese firms operating in China serve the U.S. market, they cannot help but be affected by problems in the U.S.-China trade relationship. At the same time, just as the U.S. government is signaling the importance it places on intellectual property protection, its rivals also need to protect their own IP.According to Richard Baldwin, an international economics professor, per the rules of the global value chain, if a country is trusted to respect the tangible and intangible intellectual property of its counterparts, high-income nations will outsource production to that country. At present, Taiwan must recognize that there is a need to demonstrate to international companies a strong commitment to safeguard intellectual property rights and protect business secrets. This is especially important for Taiwan given its involvement in various aspects of the manufacturing process, including automation, information production, and safety. We should also take this into consideration when looking at the current trade dispute between the U.S. and China.