AFTER weeks spent threatening tariffs on an ever-greater share of Chinese imports, President Donald Trump seems to be in a more conciliatory mood. On April 10th a speech by the Chinese president, Xi Jinping, prompted him to tweet a prediction: “We will make great progress together!”
Many besides Mr Trump share that hope. If China offers him a deal that he is willing to sign, a trade war may still be averted. Or sense may prevail, as it did last month, when American allies such as Canada and Mexico were exempted from tariffs on steel and aluminium. But such optimism shades into naivety. China hawks in the American administration have long seethed over aspects of the relationship with China that rarely feature on Mr Trump’s Twitter feed. Those problems predate his presidency. And they do not look easy to resolve.
The rules-based system of international trade works best for problems that are clearly defined, and when it is easy to judge the success or failure of a remedy. Tariffs, and laws that discriminate against foreign firms, are classic examples. Some of the Trump administration’s gripes with China, published in a 182-page report on March 22nd, fall into this category. (The report was the result of an investigation into China’s trade practices under Section 301 of the Trade Act of 1974, which grants the right to threaten tariffs if unfair practices are uncovered.)
For example, it claims that Chinese law discriminates against American companies by undermining their freedom of contract in several ways. Chinese firms can negotiate with each other over the terms of technology-licensing agreements, but foreign licensees must bear all the risk of others suing for intellectual-property infringements. Joint ventures must grant the Chinese partner the right to use the foreign partner’s technology even after their agreement has expired. Such complaints will be considered by the World Trade Organisation (WTO) and judged against the commitments China made when it joined in 2001.
But resolving America’s other gripes will be harder—whether in the WTO or as part of a bilateral deal. Some are not to do with China’s written laws, but with its unwritten rules and informal procedures. Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access. But the Americans say Chinese officials continue to pressure firms to do so.
Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes. And experience suggests that any deal would be devilishly difficult to enforce. The Chinese authorities can say that contracts involving technology transfer were signed voluntarily. They can make life hard for any foreign company that dares say otherwise. Robert Atkinson of the Information Technology and Innovation Foundation, an American think-tank, accuses the Chinese of playing rope-a-dope, allowing the American administration to exhaust itself in ultimately futile complaints. He thinks that it should give up on the rules and focus instead on results, for example by arranging for American firms to inform it “off the record” of Chinese infractions. But any such flexible, unclear arrangement would be fiercely resisted by the Chinese.
Half of the Section 301 report concerns Chinese investment in America. The Americans take issue with Chinese firms’ acquisitions of American ones, such as Lexmark, a printing company, in 2016, and Mattson Technology, which produces equipment for making semiconductors, in 2015. In both cases the purchase price was well above market value. The Chinese maintain that these were fair transactions on the free market; the Americans suspect that they were directed and supported by the Chinese government in a bid to dominate strategic sectors. Any mutual agreement to curb such purchases would have to outline a legitimate role for the state. But China’s model of state-directed capitalism makes it hard to distinguish between public and private affairs.
At the heart of the disagreement is China’s industrial policy. The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures. They spy a plot to undercut and eventually surpass American industry.
The Section 301 report relays the story of SolarWorld, a maker of solar panels that claims its trade secrets were stolen. The result was that cheap Chinese competitors flooded the market, costing it more than $120m in sales and revenue. The Americans worry that unless the Chinese government changes its ways, other American industries will soon lose out to China, too.
But what the Americans see as unfair the Chinese see as the path to development. From their point of view, bringing in American firms is a roaring success. A study analysing joint ventures in China in 1998-2007 found that they boosted both the Chinese partner and the industry in which it was active. Ventures with American firms were more fruitful than those with firms from Hong Kong or Japan.
During his speech this week, Mr Xi repeated old promises to cut tariffs and relax investment restrictions in some sectors. The American vision is of more sweeping change. According to Bloomberg, a news service, secret bilateral talks broke down after the Americans demanded an end to Chinese subsidies for high-tech industries. It is hard to imagine a deal that reconciles these fundamental differences. That leaves a choice—between an agreement that is shallow and fragile, or conflict.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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