Economics

How China Can Stop Trumpism

Its unfair treatment of foreign companies has driven the rise of populism.

Should be a two-way street.

Photographer: Feng Li/Getty

At a recent forum, China's Vice Finance Minister Zhu Guangyao warned that a "zero-sum" mentality in economic relations between the U.S. and China hurts both countries. He's right: Rising protectionism, of the kind favored by President-elect Donald Trump, is a danger to the still-sputtering global economy. What China doesn't yet accept is that much of the ire against free trade spreading around the world is a consequence of its own policies. If it wants to curtail the rise of protectionism, it should start at home.

China has arguably been the biggest beneficiary of globalization. Thanks to open markets in the West that welcomed Chinese exports, and an ample inflow of foreign investment, it was able to largely wipe out poverty, become a premier manufacturing power and create a vast new middle class.

Yet a big reason why so many people in the U.S. and elsewhere have come to see globalization as detrimental is because it forces workers in high-cost countries to compete head-to-head with low-wage Chinese. Open markets have come to seem "rigged" against the West's hardworking households.

For that, China can't be held responsible -- unless you consider being poor a crime. But its government has made matters worse by not reciprocating the openness of its trading partners. For long stretches, China controlled the value of the yuan to promote its exports at the expense of others. It has subsidized major industries, such as steel, and keeps excess capacity churning, which skews global markets and pressures rivals. It continues to impede foreign firms by restricting their investment in sectors from insurance to entertainment, and tying them up in red tape.

Such tactics have convinced many politicians that they need to fight fire with fire. Trump portrays China as cheating at the expense of American jobs and industry. His response has been to threaten to hike tariffs and label China a "currency manipulator." Some of Trump's accusations are spot on -- China does discriminate against foreign firms, for instance. Others, such as his tirades that China is still devaluing its currency, are off target. The point is that Trump sees his hardball position as a response to China's own business practices.

And he's not alone. In its 2016 annual report, the U.S.-China Economic and Security Review Commission, which advises Congress, accused China of a litany of unfair practices, from cybertheft to forced technology transfer from foreign firms, and recommended tough countermeasures. Senator Charles Schumer has called for extra scrutiny of acquisitions by Chinese firms, citing the hurdles that American companies face when attempting similar purchases in China. German Chancellor Angela Merkel, during a June visit to Beijing, argued for a legal framework that would allow foreign companies in China to "enjoy the same rights and privileges as domestic companies."

China hasn't done much to appease these critics. Despite pledges to continue "opening up," progress has been glacial. American firms say that they feel increasingly unwelcome in China. Yet in response to Trump's tough talk, China has simply threatened to fight back. The Global Times, a Communist Party tabloid, recently warned that if Trump took a harder line on China, Starbucks could lose market share on the mainland "if American brands suffer in the fallout."

China's leaders would be better served by honoring their pledges to further open their markets and lift restrictions on foreign investors. As HSBC Holdings Plc economist Frederic Neumann argued in a recent commentary, if the government wants to promote free trade, it must convince its partners that they, too, can benefit from lowering barriers. China, he wrote, "would have to throw open its markets to its trade partners, offering where needed wider access than it receives."

By lowering hurdles to trade and investment, China would not only remove reasons for others to pursue protectionist policies, but also help solve the problems behind rising anti-trade sentiment. For one thing, it would likely help shrink its contentious trade surplus with the U.S. By increasing competition at home, it would also force its lumbering companies to become more innovative, competitive and profitable, which would boost its long-term economic prospects.

If China is concerned about a reverse of globalization, in other words, its leaders should practice the free exchange they preach.

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

    To contact the author of this story:
    Michael Schuman at contactschuman@gmail.com

    To contact the editor responsible for this story:
    Timothy Lavin at tlavin1@bloomberg.net

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