China’s Made in China 2025 program creates a confrontation at a time of a multiplicity of disputes over technology. The other big tech controversy involves Trump’s tariffs, to be imposed under Section 301 of the Trade Act of 1974, for theft of intellectual property.
Chinese rules, in contravention of WTO obligations, require foreign companies to hand over technology for market access, and China outright steals, through cyber and other means, U.S. tech. The theft, from all indications, amounts to hundreds of billions of dollars a year.
The first of Trump’s 301 tariffs, scheduled to go into effect July 6, have riled the Chinese leadership. “In the West, you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” Xi Jinping told the Global CEO Council, a grouping of foreign business leaders, on Thursday in Beijing. “In our culture, we punch back.”
“China is not going to yield to outside pressure and eat the bitter fruit,” a senior Chinese official told the Wall Street Journal. “That’s the negotiation principle set by President Xi.”
Xi Jinping can throw a punch and establish all the principles he wants, but he is in no position to sustain U.S. retaliation. His punch remark is widely interpreted as a threat to go after American companies in China, but Chinese officials are not especially enthusiastic about that course of action. “A big worry for China is that foreign investors are opting to leave the country,” a Chinese government source told the South China Morning Post. “The option of targeting U.S. firms in China has never been on the cards.”
That last statement is certainly untrue. In any event, this is a particularly bad time for Beijing to target U.S. companies. The U.S. economy is vibrant, and China’s is slowing fast. China absolutely depends on access to the United States. Last year, 88.8 percent of the country’s overall merchandise trade surplus related to sales to America.
Chinese officials recognize Xi’s mistake. A Finance Ministry official told Bloomberg News that Beijing made a “major misjudgment” of U.S. determination to confront China.
It is, from all appearances, a bad time for China to target any other country at all. Various indicators for China’s economy in May—in particular, fixed-asset investment, industrial production, and retail sales—either hit historic lows or brushed close to them. Chinese equity market indexes are plunging—the Shanghai Composite is the world’s worst-performing major stock index this year—and the renminbi is tumbling against the dollar.
And if all that weren’t bad enough, China has been accumulating indebtedness faster than it has been growing. When so-called hidden debt is taken into account, the country is now incurring maybe one-and-a-half times as much debt as it is producing nominal gross domestic product, even if the official GDP figures were not substantially inflated, which they most certainly are.
Therefore, just about nobody but Xi thinks this is a good time to take on America, especially with a determined Trump at the helm. Said Jude Blanchette of the Crumpton Group to Bloomberg News, “People are going to look back at this year as the pivot point when Xi Jinping overreached and sparked an international backlash against the Party and China’s development model on multiple fronts.”
That might not stop Xi. As Stephen Roach wrote in the official China Daily Wednesday, “Xi does not do capitulation.” Yes, but by resisting reasonable requests from Washington and other capitals he is effectively setting his own country on fire.
After all, “Chinese swagger” has unintended consequences, as Blohm explained to me: “It’s ‘now or never’ go for broke before eventually going broke.”
Image: U.S. President Donald Trump and China's President Xi Jinping arrive for a state dinner at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Jonathan Ernst