China: It's Good to Be the Emperor
Unlike Las Vegas, what happens in China does not stay in China. It is the world’s second largest economy, the top trading partner for a wide and growing range of countries around the planet and a rising military power with a reach beyond its immediate neighbors and waters. In early March 2018, China amended its constitution by an overwhelming vote in the National People’s Congress, to abolish a law that prohibits a president from serving beyond two-five year terms. President Xi Jinping can now remain in power for as long as he sees fit or until someone pushes him from office. Whatever the eventual outcome, Xi has changed the rules of the game and this has implications for the rest of the world, especially when it comes to trade relations with the United States.
China's Emperor Has a Full Agenda
Since Xi become head of the Communist Party in 2012, he has aggressively purged party rivals, brought the military more under his control and made certain that the country’s big business leaders know who is in charge. In many regards, Xi has taken China back to where it was under Mao: power is narrowly concentrated, though with far less upheaval and brutality.
From Xi’s perspective there are good reasons to turn China into a one-man dictatorship. Only with unchecked power can he achieve his grand design of restructuring China and making it the world’s leading power. In this context, Xi now has more clout to deal with corruption, vested interests in the problematic state-owned enterprises (SOE) sector, local governments with heavy debt burdens and big business leaders who pursued aggressive overseas expansion (threatening to escape Beijing’s control). At the same time, China needs to overhaul its financial sector, deal with bad loans, shadow banks and onerous pension issues. And maintaining strong economic growth is essential to keeping the country’s citizens content and not thinking about political freedoms.
On the foreign policy front, Xi is better able to push his ambitious Belt and Road Initiative to link up markets across Eurasia and East Africa under Chinese auspices, further assert Chinese dominance in the South China Sea, and gain more influence in international organizations (especially as Washington pulls back). Xi may even be emboldened enough to try to achieve what the People’s Republic has long dreamed of—reuniting Taiwan with the mainland. President Xi will also be in a better position to deal with the United States over such issues as trade, North Korea (a complicated mutual concern) and the future direction of the international geopolitical order (preferably under Chinese guidance). Indeed, the chair of the foreign affairs committee of the National People’s Congress has stated that “the U.S.-led world order no longer fits.”
Trade Remains a Core Issue for China
Trade has been an important element of China’s economic success since the late 1970s. From that period forward, China emerged as the industrial powerhouse of the world, supplying everything from hammers and Christmas tree ornaments to ships and heavy machinery. Starting off by producing cheap products, Chinese companies have climbed up the value-added chain and now compete in technology and pharmaceuticals. However, China has long pursued economic policies that have taken advantage of other countries’ open trade regimes, has been restrictive in allowing foreign companies into China and put several sectors out of bounds for acquisitions as “strategic industries.” This has caused friction with the United States and Europe, where Chinese companies have been active in seeking to buy local companies.
America First vs. China First
Xi’s assumption of dictatorial powers comes at a time when the United States is becoming more protectionist under the Trump administration’s “America First” policy, which makes clear that China’s trade policies are unfair and will no longer be tolerated. Among these policies are state bank loans to Chinese companies to aid in merger and acquisitions of foreign companies. Chinese state support also keeps inefficient and struggling “zombie” state-owned companies afloat, many of which continue to export and contribute to the trade imbalance between the two countries. According to the U.S. Commerce Department, the U.S. trade deficit with China in 2016 was a massive $347 billion and rose to a record $375.2 billion last year.
Another major area of friction concerns Chinese violations of U.S. intellectual property. American companies lose billions of dollars a year to counterfeit products. According to a 2016 report by the Organization for Economic Cooperation and Development, the global trade in tangible counterfeit and pirated goods is around $451 billion, with the top three exporters of counterfeit products being Hong Kong, China and Turkey.
The Trump administration has already taken action on Chinese (and Korean) washing machines and solar panels. More recently, global tariffs have been imposed on steel and aluminum. Additional tariffs on a wide range of Chinese goods worth between $30–60 billion are probably on the way. Moreover, any efforts by Chinese companies to acquire U.S. companies are likely to find a much more challenging approval process. This sat behind The Trump administration’s move to block Broadcom’s bid for U.S. tech company Qualcomm. Although Broadcom is a Singapore-based company it has ties to China and Qualcomm is seen by Washington as a national champion and that its sale would be deemed detrimental to U.S. national security.