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COMMENTARY: The real boogieman

U.S. would be wise to focus on state-owned enterprises, not currency

By: Eric Johnson
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Photo: AlexLMX/Shutterstock
   On the official website of the Office of the U.S. Trade Representative, there’s a passage describing a challenge United States companies face when competing in global markets.
   It’s a challenge that is “increasingly competing with U.S. businesses and workers on a global scale, in many cases distorting global markets, blocking U.S. exports, and undercutting U.S. workers with cheap subsidies and preferential regulatory treatment.”
   For many Americans, the natural inclination would be to guess that this passage is about currency manipulation, and more specifically, China’s currency manipulation.
   But that passage is actually about combatting the effect of state-owned enterprises (SOEs) in free trade agreements. While the context for this statement was negotiation of the Trans-Pacific Partnership (TPP), of which China was not even involved, it’s probably appropriate to consider this statement in a more relevant context since the TPP has been jettisoned by the Trump administration anyway.
   State-owned enterprises are the real boogieman when it comes to U.S.-China trade, not currency. And that’s reflected in the administration’s near silence on the currency issues since the election. In his campaign, President Donald Trump stated numerous times he would immediately label China a currency manipulator and would take a hard line in negotiations until that manipulation stopped.
   Trump is, of course, not the first (nor will he be the last) U.S. politician to take such a stance. It’s common practice at this point for candidates to talk tough with China during a campaign, a tactic designed to gin up support from voters who see trade (and China in particular) as an enemy of a successful U.S. economy.
   Most elected officials then tone down their rhetoric once they’ve reached office, because trade relationships are never binary systems. Stopping China from managing its currency value wasn’t, on its own, ever going to change the structure of U.S.-China trade. In 2017, that’s primarily because if China let its currency float free on the market, it would inevitably drop further in value.

Even the staunchest of global trade advocates will acknowledge that China (and other nations) tilt the market in unnatural ways through their state-controlled influence over certain sectors.

   That would have the effect of both hurting U.S. exporters and dragging down China’s economy. Neither is good for the U.S. economy. And China won’t take such a drastic step just to spite our politicians.
   Trump must have realized early on that pressing the currency valuation issue once elected wasn’t going to yield the benefits he says he wants.
   Which should focus the conversation back toward the real problem. Even the staunchest of global trade advocates will acknowledge that China (and other nations) tilt the market in unnatural ways through their state-controlled influence over certain sectors.
   From a pure trade perspective, this was the most important aspect of the TPP outside of duty reduction: better accountability of U.S. trading partners’ SOE activity. That’s not to say the TPP got it perfect. The realities of certain TPP economies meant that SOEs would remain a huge part of their economies and no trade agreement could feasibly eliminate that.
   But in two specific chapters of the TPP, the issue of SOEs gaining an unfair market advantage over private sector companies was firmly addressed. One could say the transparency of this issue was stronger than the recourse language, but at least there was an acknowledgement from all parties of its impact.
   To be frank, no such public acknowledgement from all sides has occurred in U.S.-China trade relations. SOEs represent a massive proportion of China’s economy, and they absolutely distort certain markets. For instance, 2013 research from the Organisation for Economic Co-operation and Development found that seven of the 10 biggest SOEs globally were Chinese.
   If President Trump and his policy experts want to truly effect a change in the course of U.S.-China trade policy, they’d be wise to ignore tough talk on tariffs and currency, and focus on something that would really make a difference: firm rules on China’s involvement in state-owned enterprises.
   It certainly won’t be easy, and it might not be the big, flashing, neon type of instant “win” that Trump prefers, but progress on this front would be far more substantial and successful than chasing policies that induce trade wars.