7 smart ways to fix US-China economic relations

America’s economic relationship with China needs fixing. But not with tariff walls or trade wars. Nor is the big problem trade deficits or China’s supposedly cheap currency. As my colleague Derek Scissors notes in a new analysis, “Misdiagnosing an illness leads to the wrong cure.”

Shanghai skyline. Twenty20.

And there have been plenty of misdiagnoses and wrong-headed cures proposed during the current presidential campaign. So here some fact-based, data-driven approaches from Scissors for fixing this globally important trade and investment relationship:

1. Do not try to “fix” the trade deficit. There is no right number for a trade balance. A large deficit could be due mostly to predatory behavior or, as in the US case, to a large and usually outperforming economy lying at the end of global supply chains. The supposed solutions to large trade deficits are awful. They would disproportionately harm the poor through tariffs or pick winners and losers through what boil down to tax and subsidy schemes.30 This would not only elevate one group over others, it would harm more Americans than it helps.

2. Barring a large devaluation, ignore the yuan. The yuan cannot be the basis for American policy. It was almost surely undervalued in 2008, if by an unclear amount. It has probably been overvalued since 2014. If it is properly valued in 2020, it will most likely be accidental. The biggest driver of the yuan’s value is the PRC’s wildly distorted domestic financial system, which is beyond US influence. Moreover, the proposed policy responses to Beijing’s exchange rate policy are the same as the responses to the trade deficits: punish tens of millions of Americans in order to punish China.

3. Do not grant market economy status. The WTO accession agreement indicates China should be treated as a market economy for the purposes of American trade starting in late 2016. Whatever the legal considerations, the PRC does not have a market economy or anything close to it. Its own statements about the state sector make that clear. Pretending Beijing has implemented the necessary reforms would undermine American domestic political support for economic engagement with China and can only make justified attempts to address noncommercial Chinese behavior less effective and more complicated. It would be doubling down on a flawed WTO decision.

4. Reorient policy to focus on foreign barriers. Punishing China (or others) just for selling cheap goods Americans want to buy is self-defeating. The US should, however, consider sanctions for unacceptable barriers to exports. A prime example is China’s sheltering of SOEs from competition. While Chinese SOEs are not major exporters, the sectors in which they are most protected likely experience excess capacity and dumping, and sanctions in those cases might encourage reforms that Beijing has failed to undertake until now. Moreover, SOEs want to invest in the US and can be reasonably restricted on the grounds they do not operate on a commercial basis.

5. Sanction the beneficiaries of stolen IP. Criminal charges against IP thieves do little to protect American innovation. In contrast, spending time and resources to track the theft of brands and technology to final users could be extremely useful. Depending on the extent of their complicity, Chinese entities and their subsidiaries using stolen IP could be subject to limits on investment in the US all the way to being barred from any business, including export. This will not be easy but has been shown to be possible. It has the distinct benefit of shielding those who respect IP and therefore encouraging good behavior, which is indispensable for the US to gain from the economic relationship.

6. Postpone any bilateral investment treaty. In light of IP theft and noncommercial operation by SOEs, the Obama administration’s pursuit of a bilateral investment treaty (BIT) is odd. American regulators need to be able to act freely against Chinese investors that have broken the law, and Beijing shows no interest in treating American firms better.   BIT is warranted only after years of better policy from Beijing. The American business community should have learned from WTO accession that the PRC has many ways to circumvent agreements it does not like. If the business community refuses to learn, the US government should recognize that difficult votes pertaining to globalization should be used more wisely than on a China BIT.

7. Enforce existing US laws. This is less a China problem than an America problem. Branches of the US government appear unwilling to hold Chinese firms or firms involved in China-related business to the letter of American law, particularly with regard to disclosure. Chinese entities have cited obligations to their own government as overriding. If so, the operations of these entities should not be deemed as meeting regulatory requirements, and some should be banned from the US altogether. A looming issue as the Chinese presence expands is predatory pricing or other antitrust violations, where the accused may also seek to void American law.

There are a few other ideas from Scissors in his report, “Fixing US-China Trade and Investment.” Lots of myth-busting, in addition to the proactive policy ideas.