The last blog pierced the China meme – the premise that we need to do trade deals with countries in order to keep China at bay. But if trade deals with other countries aren’t the way to deal with competitive threats from China, what is?
Part of the problem is that trade people look at China almost exclusively through the prism of trade, where membership in the WTO restricts the U.S. ability to take unilateral action to address mercantilist conduct. Yet there is a much broader concern with how Chinese firms compete in the world. If we want to be equipped to confront the competitiveness problems China poses, then we need to look, holistically, at a minimum of three areas: trade, antitrust, and financial reporting. This paper goes into the issues in more detail, through the prism of a case study, aluminum, to understand the issue in a more concrete way.
The model is essentially this. The Chinese government identifies industries it wishes to grow. It incubates those industries. Companies within those industries often access global financial markets and, based on financial reporting subject to limited or no U.S. oversight, secure additional financing necessary to dominate a particular industry. The Chinese government keeps a watchful eye over these companies and actively supports consolidation and vertical integration to enable these companies to compete more effectively. Even after incubation, the government will provide subsidized loans if the capital markets are insufficient. While foreign producers are subject to market constraints – such as profitability – Chinese companies are not. They are able to dominate global markets, in relatively short order, driving foreign competitors out of business. This is true even when, or perhaps especially when, the Chinese government, in its execution of “state capitalism,” miscalculates supply and demand. Whether driving foreign competitors out of business is the goal, or a byproduct, is not all that relevant. This is China’s development strategy.
While aluminum is an illustrative example, it is just that — illustrative. The Chinese government has been explicit in stating that it seeks to enjoy similar success in other areas, including information technology, aerospace, vehicles, and pharmaceuticals.
The United States has a fragmented, haphazard way of addressing any competitive threats from China – and in some cases, our government has abdicated its responsibility to address these threats. But as the foregoing makes clear, the Chinese approach is anything but haphazard. The United States must take a more holistic approach to China. A broader strategy is needed. In the meantime, however, there are tools that can be used, today.
- Trade. In terms of trade, the irony is that the United States, as one of the chief architects of the GATT regime, sought to foreclose unilateral trade actions outside the ambit of the organization. Thus, the U.S. ability to act unilaterally is limited. Harvard Professor Mark Wu has explained the ways in which the WTO is challenged in its ability to handle the particular economic model China has adopted. In terms of aluminum, the Obama Administration did file a complaint with the WTO in January 2017, and the Trump Administration could pursue it. The goal would be for China to eliminate subsidies to its aluminum industry. In addition, President Trump can impose duties pursuant to national security laws. Although there is much squawking about the GATT-consistency of such an undertaking, it should be noted that Congress adopted the predecessor to today’s national security trade provisions in the 50s, shortly after the GATT was created. The GATT has an essential security exception, and that exception is self-defining. In Congress’ view, GATT membership was not a bar toward maintaining industries necessary for national security.
- Antitrust. The Supreme Court would do well to reverse a lower court decision that deprives the judiciary of jurisdiction if the Chinese government instructs its companies to violate U.S. law. Congress should also consider amending the law to clarify that jurisdiction obtains even in the case of conflict of law. Finally, federal antitrust officials might consider taking more aggressive action against foreign anticompetitive behavior. While some believe that antitrust issues can be addressed in trade agreements, there is reason to proceed judiciously. TPP included a competition chapter, but it enshrined the consumer welfare standard that is currently subject to extensive debate in the United States. It is not at all clear that adherence to a consumer welfare standard will produce desirable results in this particular area; as some have noted in a glib plea to do nothing about the problem, consumers are beneficiaries of China’s approach toward aluminum. It’s workers and businesses that are feeling the pain.
- Financial reporting. Federal legislation requires any company listed in the United States to have its audit workpapers available for inspection by the U.S. Public Company Accounting Oversight Board, whether the auditors are American or not. The Chinese government has successfully thwarted U.S. efforts to inspect these workpapers. In response, the Securities and Exchange Commission, which has the authority to delist these companies, has instead effectively condoned Chinese defiance by imposing woefully minimal fines on non-compliant audit firms. The SEC recently appointed an entirely new Board to the PCAOB. Will this Board be more aggressive? If so, will the SEC back it? Chinese companies not listed in the United States are not subject to review by American audit overseers. However, in some cases, U.S. securities laws do afford protection for shareholders even if the company is not listed on a U.S. exchange.
