International Trade and Global Business

 

The US and China: New Vocabulary for a New Relationship

Two rounds of trade negotiations between US and China government officials, but no agreement just yet. We learned after the most recent round in Beijing that the form of the agreement, which must be approved by President Trump and President Xi, may be a memo of understanding.  However, the deadline to significantly increase tariffs on Chinese imports has just been delayed by President Trump, sighting “substantial progress” during the most recent trade talks.

There are a lot of issues to sort out, some of them so complex and emotionally fraught that full consensus may not be possible in the remaining time. Diplomats have a fix for that and it’s called a framework. For example, we agree that China needs to find a different WTO compatible way to support its State-Owned Enterprises (SOE). These companies get huge government subsidies at the expense of smaller privately-owned firms. They can and have produced a surplus of steel on the world market, driving down world prices and affecting non-China steel producers.

Persuading China’s government to substantially change the way SOEs operate will not be easy, certainly not in two weeks, if ever. This is why a framework to resolve the issue by some date in the future may allow parties to agree on some more easily accomplished things while kicking this can down the road.

Purchases of more US goods by China is a fairly easy lift, but the surplus China enjoys will not reduce it much. Always good to sell more soybeans and LNG, but what US business wants is more access to the China market, to be treated the same as domestic companies, to be able to purchase and own 100 percent of a business and to have their intellectual property protected, among other things.

IPR is difficult because to sell a product in China, as well as many other countries, you need a certificate from the government. Different rules are applied differently, but companies trying to enter the China market have long complained that regulators insist on detailed information about the product, which can reveal the secret sauce. Government examiners can then essentially steal this information and sell or give it to a local competitor.

US negotiators will be trying to ensure safeguards are put in place that reduces the likelihood that secrets will be revealed during this process. Meanwhile, the US side will be trying to put processes in place that will help verify that the controls are working. This will be tougher, and the Chinese will be sensitive to US overreach. The US is also demanding an end to the practice of requiring US companies to share their IP with their Chinese partner, putting the IP at risk if the venture does not work out.

Nope. Soybeans won’t do it this time or next.  Everyone needs to get used to the terms of structural reforms and action-based verification. Another term is decoupling, a deliberate downsizing of the entire economic relationship. Chinese officials publicly say this would be a disaster. Many US businesspeople would agree.  It’s a new vocabulary for a very different relationship.
 

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