Will the warmth of the Trump-Xi summit linger?

An edited version of this blog first posted on Asia Times.

President Donald Trump’s 2-days+ visit to Beijing received state-visit+ treatment as promised and he showed a video of his granddaughter singing a popular song from China in Chinese, which President Xi Jinping applauded with a rating of A+. It was by all accounts quite a felicitous, triple plus event.

Showing his cute granddaughter singing and reciting poetry in Chinese was a masterful touch. The Chinese loved seeing foreigners adopt Chinese language and culture. Even awkward novice attempts were warmly encouraged and welcomed.

Contrary to his reputation for unpredictability, Trump had no surprises up his sleeve. His public posture was that of a statesman and diplomat. He most likely dispelled fears and exceeded expectations of many.

The twelve+ minute of the press conference that followed their private conversation was warm, positive and emphasized collaboration and cooperation. On issues where they differ, their agreeing to disagree seemed respectful and amicable.

Of course, whether such a warm and forward-looking beginning will lead to “progress for the benefit of the peoples of both countries,” to paraphrase Trump, depends on follow-up meetings between negotiating teams delegated by their respective leaders.

If the ensuing negotiations by the respective groups follow the spirit of seeking to build from common interests, progress would be made. But already, observers in Washington are already claiming that once Trump returns to the Whitehouse, advisors from the confrontational school will resume their places with the same old tired arguments in favor of treating China as an adversary. It will be business as usual; nothing changes.

From the press conference, Trump did state that China and the U.S. would join together to fight global terrorism. This could be a significant shift in attitude. In past administrations, the American position fell more along the lines that “my terrorists are your terrorists but your terrorists might not be mine, subject to case by case review.”

Mindful of the opioid overdose epidemic in the U.S., both leaders also agreed to cooperate in the effort to stop trafficking of fentanyl. Fentanyl is a potent form of synthetic opioid and a leading cause of death by overdose in the U.S. China agreed to broaden the control of precursors to fentanyl and to halt the illegal manufacturing of the drug inside China.

China in turn had asked for American cooperation to facilitate the repatriation of fugitives now residing in the U.S. Some exchange of information and joint investigation had already taken place. Lacking is a bilateral agreement that would facilitate extradition and act as deterrent for other fugitives. Trump offered his support for closer collaboration.

These are positive, relatively easy undertakings that both countries can agree to work together for desired outcomes. Other issues were not as easy and showed by the difference in which the two leaders addressed them.

Neither directly talked about the South China Sea but Xi merely said that the Pacific was big enough for both countries. Both leaders agreed to increase more military meetings and exchanges as a way of lessening tension. To my knowledge, Xi did not offer to initiate exercise of freedom of navigation (FON) in the Caribbean as quid pro quo for American warships in SCS.

Trump’s public comments at the press conference in regard to North Korea was tactful and did not insist, as he had in many other occasions, that China take care of the denuclearization of North Korea for America. This time, he simply allowed every nation must apply tougher sanction against North Korea in order to bring North Korea to heel. Xi simply remarked that yes, China will impose sanctions consistent with the UN guidelines; he also believed that negotiations must accompany sanctions.

As I have written previously, the Clinton Administration has shown that negotiations could work to resolve the crisis. Sanctions and threats had simply raised tensions and had been nothing but a dead end street. Xi of course was too diplomatic to publicly point this out to Trump.

Unfair or uneven trade was another knotty issue that has not seen any daylight. China taking unfair advantage of the U.S. open market has been Trump’s position, as had been that of his predecessors. At the press conference, Trump’s diplomatic position was that “it’s not China fault for taking advantage our open market.”

Xi promised to do more to open China’s market but he also pointed out that China could buy a lot more from the U.S. if the U.S. weren’t so restrictive on export of technology based products. The idea that high tech product for civilian use could potentially have military applications have throttled export sales to China.

It is disappointing that the debate on trade with China has not changed much for at least the last three administrations. Many of the assumptions underlying this debate had been invalid or erroneous or politically motivated by domestic politics in the U.S.

Here is a summary of arguments relevant to the trade issue.

(1)        Low cost imports from China are not harmful to American interests. On the contrary, it’s beneficial because American consumers enjoy lower prices. Jobs are not lost because this kind of manufacturing could no longer be done competitively in the U.S.

(2)        Nothing in the principles of economics demand balance in the calculation of bilateral trade. So long as trade is not based on predatory practices such as hidden subsidies, then trade is fair and market based.

(3)        Bilateral trade statistics have been biased by the way import value is calculated. Popular example used to illustrate the distorting is the iPhone. Value added by the assembly work done in China represents less than 10% of the value of the final product. Yet the entire value of phone is attributed to China as the country of origin.

(4)        Around 60% of China’s exports to America are made by American subsidiaries and joint ventures in China. China gets the blame for the trade surplus but it’s the American companies that pocket the revenue.

(5)        Trade in services is overwhelmingly in favor of the U.S., around 4 times greater that China’s export of services to the U.S. and is the sector that is fastest growing.

Taken all into consideration, the so-called trade imbalance is much less than has been portrayed.

Encouraging inbound investments from China would be another remedy to achieving balance of payments, but the potential is strangely and ironically is under realized. With rising labor cost and land acquisition cost in China, Chinese companies are increasingly looking to locate manufacturing plants in the U.S. Closer proximity to the market and lower energy cost can make locating in the U.S. economically appealing.

Nearly every governor and many city mayors in America understand the value of Chinese investments in creating jobs and increasing the tax base. Many make regular visits to China to entice Chinese companies to locating in their neighborhood. Yet the federal government and the U.S. Congress seems intent on raising the barrier to Chinese investments by strengthening the mandate of the Committee on Foreign Investment in the U.S. (CFIUS).

Even without the anticipated revision by Congress that would expand the jurisdiction and expand the types of investments that would be subject to review, investments from China are already more likely to be scrutinized by CFIUS than from any other country and also are more likely to be disapproved. It seems that Chinese investments are more dangerous to national security than from any other country. And the amorphous danger outweighs the economic benefits.

China’s economy will soon surpass the U.S. To discourage Chinese companies from the largest source of capital to invest in the U.S. is truly against America’s national interests. Xenophobia and China bashing has real costs.

When Trump returns from his long journey to Asia, it will be interesting to see if the upbeat feelings generated in the private meeting of the two leaders in Forbidden City will lead to a new direction for the bilateral relations--one that represents a win for the peoples of both countries. Or, we can check off another opportunity lost as Washington goes back to China bashing as usual.

How Xi can make Trump's visit a success

An edited version appeared in Asia Times

It has been widely reported that the Whitehouse staff has been busy preparing a comprehensive approach to China for Trump’s widely anticipated trip to China in November. In fact, two different approaches have been formulated based on the idea of confrontation or cooperation.

Most prominent advocate in favor of confrontation has come from the Steve Bannon school of international thinking, wherein Gordon (the Collapse of China) Chang salutes Bannon as the Paul Revere warning America of the coming economic war with China.

A whole generation of China watchers has been waiting for Chang’s prophecy to find some shred of reality but can only conclude that he is a blindfolded seer muttering gibberish in the wilderness. Yet, Bannon’s Breitbart has seen fit to elevate Chang to the position as “renowned expert on Asia.” This mutual admiration speaks volumes on the callow superficiality of these novitiates in international relations.

Any student of Econ 101 knows that the notion of an economic war between the U.S. and China is preposterous. Much of Bannon’s argument, as is those from Commerce Secretary Ross, rests on the charge that China has gained unfair possession of corporate America’s intellectual property.

We owe it to helping ensure the success of Trump’s China trip by examining this question of China’s alleged hijacking American IP in some detail.

It’s true in the 1980’s and 1990’s, China’s economy was tiny compared to the U.S. and its quality of technology far behind. Therefore as a matter of national policy, China insisted that for certain critical industries, foreign companies wishing to invest in China must form joint ventures with foreign ownership not to exceed 50%. Passenger cars belong to one of these critical or so-called pillar industries.

However, it would be inaccurate to accuse China of coercing the foreign company into handing over its know how and trade secrets. To paraphrase Bill Gates when he entered China, “You want to play in the China market, you go by their rules. If you can’t abide by their rules, don’t enter.” (Google elected to withdraw from China but Baidu came up with their version of search technology anyway.)

GM was one of the first car companies to invest in China and had to form a 50/50 JV with Shanghai Auto Industries Corp. No doubt SAIC learned a lot from their JV partner, but look at what GM got.

GM introduced their Buick into China just as China’s market for passenger cars was taking off and Buick became the established “luxury” car for the Chinese consumer. At one point, GM’s take of profits from all the Buicks sold in China, even at 50%, exceeded the total of the paper-thin profits GM earned from all the sales in the US. GM’s profit from China delayed the inevitable bankruptcy of the parent for some years.

Getting into the China market in exchange for sharing their technology was a deliberate business decision, no coercion involved. Few companies that made the decision to get into China regretted doing so, only the politicians back home like to cry foul.

Autodesk in the San Francisco Bay Area faced a different problem. They had a computer aided design program for the PC that was extremely popular in China. Except, practically every copy in China at the time was a bootleg copy; very few if any were paid for. For years, software piracy was a popular bone of contention between the American embassy staff and the Chinese officials.

The country manager of Autodesk saw the problem differently. He saw all the pirated copies as his installed base, already trained and familiar with the basic program. He then introduced a high-rise building design application to run on top of the CAD program, which he then sold like hot cakes. At the time China was undergoing a building boom and the users were far more interested in paying for the package and getting trained to use the building design program than spend the time trying to find a bootleg version.

Today, China’s economy has narrowed the gap with the US and has been developing its own IP that might benefit the US; in other words a reversal of roles is underway.

Take the example of China Railway Rolling Stock Corp (CRRC) in the US. This company has won contracts to supply subway cars for new lines and replace old cars in Boston, Chicago and Los Angeles. The contract for each city was worth well north of $500 million and each car delivered will qualify as “Buy America,” which means with a local content exceeding 60%.

CRRC will accomplish the local content requirement by shipping the outer shells from Changchun to the US and make all the other components of the car in the US. The final assembly would also be done in the US. CRRC’s proprietary design has reduced the weight of the car, thus reducing cost while enhancing rider safety. They will use their manufacturing methodology in America and supervise local (American) labor to make a superior product.

The CRRC bid was at least 20% lower than competing bids from Canada and South Korea. There were no US bidders. In other words, the use of Chinese know how will provide American cities with state of the art rail cars, at affordable prices, made with American labor, and resulting in the infrastructure improvements to make America great again.

The point about IP is that it’s a dynamic, ever changing asset and not static like a piece of gold that could be locked up in the vault. The owner can profit by sharing its know how via joint venture or license. The IP can also leak away, as employees leave the company, for example. Competitors can copy and reverse engineer to achieve the same end. Even carefully written patents are not foolproof but serves as the beginning of disputes giving litigation attorneys countless billable hours.

The issue of intellectual property ownership is simply too complicated for the Bannons or Bannon-lites to use effectively for the purpose of stoking friction between China and the U.S.

There are other companies from China that would like to invest in America, share their expertise in low cost production for the benefit of local employment and economy. GM for example invited Fu Yao to invest in a plant in Ohio to make windshields for the auto industry. The governor of Ohio was ecstatic. So long as xenophobia does not intrude, good things happen.

Judging from the rapport China’s Xi established with Trump in his visit to Mar-a-Lago earlier this year, we could surmise that Xi has figured out how to make Donald Trump feel good about himself. Xi can use the goodwill to point out to Trump that the flow of technology is now bi-directional and sharing can only help both countries achieve greatness.

In a private conversation, Xi might want to explain to Trump that North Korea won’t feel that they have reached mutual threat parity with the US until their intercontinental missiles can reach Trump’s properties on the East Coast and hurt him in the pocketbook. The only way to calm down the situation is to talk.

Xi can’t tell Pyongyang what to do, but certainly can try to broker a session at the conference table. The operative words are step-by-step, confidence building conversation that hopefully can lead to serious negotiations. Since Trump does not have the patience for this painstaking process, Xi could hint that someone else should take the lead.

Trump in turn can shower praise on Xi’s vision in creating the Belt and Road Initiative and make the observation that trains already run from China straight to London, an economic lifeline increasingly vital to U.K. as Brexit moves forward. Given that governor Jerry Brown has already declared California to be part of the initiative, Trump may also want to ask Xi how the US can participate in the BRI.

A surprising offer would be for Xi to propose sharing China’s quantum encryption technology with America! The idea would be to initially develop hack proof communication between the governments in Beijing and Washington and gradually expand to cyber communications between two countries and put the network out of the reach of the criminal elements. The implications would be huge and Trump can look exceptionally statesman-like as he emerges from his visit to China.

The key to making Trump’s China visit an unqualified success, in addition to having positive cooperative developments to talk about, is to keep the two leaders’ exposure and engagement with the western medial to a minimum.  Minimize the opportunity for Trump to strut or tweet and for the western media to create real or fake news. Let the discussions and frank exchanges proceed behind closed doors.