Wishful Thinking

Rebutting Jack Ma's Free Trade Op-Ed

Let's not pretend China is a bastion of laissez-faire capitalism.
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In an op-ed published by the Wall Street Journal on Wednesday, Alibaba Group Holding Ltd. Chairman Jack Ma made the case against escalating trade tensions between the world's two most powerful economies.

"Both Sides Would Lose a U.S.-China Trade War," was the headline. It's the same argument I made a month ago, and I wasn't the first because, frankly, it's kind of obvious.

The general arguments Ma lays out are sound: "Economies produce what they are best at making and import other things" and "economic indicators suggest that the U.S. economy is doing well, regardless of the trade deficit." 

Jobs for All

Jack Ma's right, U.S. unemployment is at its healthiest in more than a decade

Source: U.S. Bureau of Labor Statistics

Two weeks ago I said the U.S. needn't gripe about Apple Inc.'s iPhones being made in China because most of the value -- and profit -- is American. Ma makes the same point.

But he also talks about China as if it's an open, booming economy ready to share its spoils with the world.

It is therefore ironic that the U.S. administration is waging a trade war at a time when the largest potential consumer market in the world is open for business.

That's not the case.

At best, the door to China is ajar. Not only do significant trade barriers remain in the form of tariffs, but its investment rules and restrictions make it exceedingly difficult for foreign companies to set up shop. I'm not claiming barriers don't exist elsewhere because few nations in the world are purely free-trade economies, but China and its business leaders are straying from the truth if they plead innocent.

Take import tariffs.

Despite joining the World Trade Organization 17 years ago, China still charges duties on numerous foreign-made goods. So do many other countries, but China's tariff levels routinely exceed those of the U.S. The ad valorem duty on soybean (HS code 120190), the biggest U.S. export to China, is 3 percent. Not innocent themselves, the U.S. charges an import levy not based on value but weight, which worked out to be about 0.126 percent last year, according to Gadfly calculations.

This trend is consistent throughout the major categories of products traded between the two nations. Electrical machinery (HS: 85) tariffs range from zero to 35 percent going into China, with an average of 8.7 percent, WTO data show. At the U.S. border, they average 3 percent, and range from zero to 15 percent.

For aircraft (HS 8802), despite not even being a big export for China, Beijing was already charging as much as 5 percent before increases on selected categories in retaliation for President Donald Trump's proposed steel tariffs. For cereals (HTS: 10), it's an average of 24.2 percent for China, and 1.5 percent for the U.S. Though let's be clear, Washington does sneak in extra by charging according to weight rather than value.

Fair Trade?

China routinely charges higher tariffs than the U.S.

Source: WTO

Note: Shows average across category, includes tariffs based on value (ad valorem) and those based on weight as charged by the U.S.

More insidious are the non-tariff barriers that China has in place.

Investment restrictions are the bane of foreign businesses trying to get things done in the world's second-largest economy. Ma himself should know this -- he had to set up a variable interest entity registered in the Cayman Islands just to list Alibaba on the New York Stock Exchange. Seriously, Jack, how can you claim China is open for business when you had to make your own company non-Chinese just to IPO!

Even Xi Jinping tacitly admitted that China's not so open when he reiterated a pledge this week to ease restrictions on foreign ownership in the auto industry. Chinese automakers already own foreign car companies.

Ma closed his piece by talking about Alibaba's plans to connect China and the U.S., an initiative he unveiled last year.

"While we may face setbacks in the current protectionist environment, I remain confident and look forward to the next 20 years."

I too look forward to the next 20 years, Jack, but let's not pretend that protectionism is a foreign concept in China.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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