China Market Access in Spotlight as First Trump-Xi Meeting Nears

  • Companies from U.S., EU say China is becoming more closed
  • ‘Made in China’ plan seen increasing trade surplus with U.S.

Henry Paulson used to urge his Chinese counterparts during trade and investment talks to help him keep America’s markets open to them by increasing access to theirs.

"It’s much more true today than it was when I said it," Paulson, who served as treasury secretary under George W. Bush, said at a forum in Beijing in March. "More and more we are hearing: ‘Why should we let Chinese come in and invest in certain industries when we can’t do it in China?’"

Heightened trade and investment tensions hang over the first meeting between Donald Trump and Xi Jinping, presidents of the world’s two largest economies. Some of Trump’s complaints about China -- that it steals American jobs and devalues its currency -- have been described by economists as exaggerated, outdated or just plain inaccurate.

Yet in many areas, China does play by its own rules at home. The U.S. and European Union chambers of commerce in China both warned in separate reports last month that the country is becoming more -- not less -- closed to foreign business, and its Made in China 2025 industrial plan will make things worse.

Trump’s challenge as he meets Xi at the Mar-a-Lago resort in Palm Beach, Florida, will be the same one Paulson faced: How to convince China to open its markets further. 

Read More: The Dealmakers Behind Trump and Xi

Wrenching significant concessions from Xi will be made more difficult by the timing of the meeting. While Chinese leaders know they have a lot to lose if their trading partners turn toward protectionism, Xi needs to be seen as staunchly defending China’s interests ahead of a reshuffle of key officials at a Communist Party congress later this year, said David Loevinger, a former China specialist at the U.S. Treasury.

"Xi’s not going to just throw the White House a bone," said Loevinger, now an analyst at fund manager TCW Group Inc. in Los Angeles.

Hanging over the Trump-Xi talks will be North Korea, which conducted another ballistic missile test early Wednesday. Trump has said the U.S. will act unilaterally if China doesn’t help with North Korea, according to an interview published Sunday by the Financial Times. That statement likely set off alarms in Beijing.

Read more: How to Win a Trade War With China

Trump last week reiterated that China was to blame for chronic U.S. trade deficits and job losses, and he predicted discussions with Xi would be “very difficult.”

"We can no longer have massive trade deficits and job losses," Trump said via Twitter. "American companies must be prepared to look at other alternatives” if the talks don’t go well.

That underscored the risk that a U.S.-China trade spat could come just as the global economy appears to be perking up a bit nearly a decade after the financial crisis.

Wanting More

China’s critics point to Made in China 2025 -- a top-down plan to establish national independence in critical technologies and leadership in next-generation industries from robotics to electric cars -- which involves government support including financing for overseas acquisitions. The plan is designed to meet Beijing’s goal of engineering a national economic transition and moving the country up the value chain.

"China has been the world’s factory, and now it wants more," the European Union Chamber of Commerce in China said in a report last month.

Then-U.S. Commerce Secretary Penny Pritzker warned in November that under Made in China 2025, Beijing’s market interference could threaten the global semiconductor industry, citing previous disruptions in the aluminum, steel and green technology sectors as examples.

If China merely achieves the numeric targets in Made in China 2025, its trade surplus with the U.S. would grow rather than shrink, says Beijing-based research firm Gavekal Dragonomics. That surplus stood at $347 billion last year, accounting for almost half of the total U.S. trade deficit.

View From China

Chinese leaders have warned that the pain of a trade war would be widely shared, while asking for understanding of the unique trajectory of its development and remaining challenges. 

“Many American and Western friends think that China can’t live without the U.S., and they’re half right,” Minister of Commerce Zhong Shan said at a briefing last month. “Similarly, the U.S. also can’t live without China,” he said, citing U.S. exports of Boeing Co. airplanes, soybeans and automobiles to China.

Foreigners are always complaining about China not being open enough, but the country has opened according to the pace of its development, said Jiang Shan, former General Director of Americas and Oceanic Affairs at the Ministry of Commerce.

“We couldn’t do it overnight -- otherwise things will be chaotic,” he said. “This is the open secret to China’s success. You can’t do things which go beyond your undertaking or capability."

Read more: Trump Orders Study of ‘Trade Abuse’ Contributing to Deficits

Many Chinese policymakers don’t realize how protectionist their policies are because they see an economy today that’s far more open and globalized than it was 20 or 30 years ago, says Andrew Polk, director of China research at Medley Global Advisors LLC in Beijing.

They “also appear to genuinely believe they are gradually continuing to open, despite the recent experiences of foreign investors here,” he said. “So there is a disconnect between perception and reality in terms of China’s openness. This makes it very difficult to find a starting point for discussion.”

Words and Deeds

Xi put himself in a unique position during a speech in Davos, Switzerland, in January, as a defender of globalization against the protectionist instincts of a U.S. president. “Pursuing protectionism is like locking yourself in a dark room, which would seem to escape the wind and rain, but also block out the sunshine and air,” Xi said.

Commerce Secretary Wilbur Ross, for one, would like to see the Chinese president back up those words with action. He said last week that China is one of the world’s most protectionist nations, even though it "uses a tremendous amount of free-trade rhetoric.”

"We’d like the rhetoric and the behavior to become more congruent,” he said.

Many foreign governments and investors see a China that’s advanced immeasurably since joining the World Trade Organization in 2001, and that now has many world-class companies that don’t need to be cosseted from global competition behind a protectionist wall.

"In what other major capital market can’t a BlackRock or a Morgan Stanley or a JPMorgan come in and do something that is wholly owned?" Paulson said. "Or why can’t General Motors sell autos without a joint-venture partner? We understood it when China didn’t have strong domestic companies. Right now China does have strong domestic companies and competition would benefit them and the overall economy."

— With assistance by Kevin Hamlin, Miao Han, and Yue Qiu

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