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U.S. vs. China -- split trade from technological security

Washington must define technological security concerns more precisely

| North America
There are secrets that America does not want to share at any price.   © Reuters

The current tensions between China and America might seem to be mainly about economics. President Donald Trump's tweets complain about an unfair state-capitalist model, intellectual property theft and restrictions on foreign investment. His response, too, is all about economics: a tariff war, with demands that bilateral deficits are shrunk and trade deals are revised in the US's favor.

But behind this rhetoric is the uncomfortable reality that China's GDP will soon match America's, however it is measured. Confounded in Trump's economic bluster is the security challenge implied by China's economic heft. Today Beijing may still lag militarily, but even from this position it effectively dominates the South China Sea.

To make sense of this challenge, we need to separate the deeply uncertain security issues implied by China's rise, from the economic issues which are routine by comparison and have feasible solutions.

Trump complains that China's state-capitalist economic model is unfair. Of course China's model differs from the textbook free-market economy. But for the past quarter-century (since Deng Xiaoping's Southern Journey or even earlier) China has had a mixed economy, with the market providing China's dynamic.

China's economic model is, in fact, a familiar one. Starting with Japan's postwar recovery, all the Asian economic success stories have used export-led growth, fostered by a competitive exchange rate and intrusive industry policy. One way or another, they have absorbed foreign technology. It's hard to see anything which China does which is not also done by Singapore, with its huge current account surplus, managed exchange rate, substantial state-directed funds and centralized industry policies.

Indeed, America itself is far from the free-market paradigm. Agriculture and industry are protected in a variety of ways, including tariffs. Foreign investment must pass scrutiny. The 2008 financial crisis triggered massive state support. Whereas in China the state controls industry, in America industry controls the state through powerful lobbying.

All these complaints -- whether about economic models, bilateral imbalances or intellectual property theft -- are familiar in postwar history. So too are the remedies. In the 1980s Japan was seen as the economic and security threat, so America took action via 'voluntary' export controls to limit Japan's automotive exports, reduce the importance of MITI's industry policy, weaken Japan's dominance of computer chips and remove Japan's currency advantage.

Over time the system adapted to these distortions. Globalization is a hardy concept, not easily stifled by regulation. International trade benefits all trading nations, and a country imposing restriction on trade will hurt itself more than it hurts foreigners. Trump is fundamentally misguided to think a trade war is good for America.

As for Trump's muddled concern with bilateral balances, these are determined by domestic savings-investment balances, which Trump's measures do not address. Just as Japan's ongoing bilateral surplus could not be negotiated away with trade restrictions, Trump's measures have served only to increase the trade deficit with China.

As Trump responds to the increasing pressure to shift from 'no-win' positions back toward normality, residual distortions will remain. But the global trade system was full of distortions before Trump. Agriculture almost everywhere sits behind massive protection. The principle of multilateral trade was lost long ago, with more than 300 discriminatory so-called 'free trade agreements' -- endorsed by the WTO.

Despite these long-standing imperfections, global trade grew far faster than GDP over the postwar period helping to lift a billion people (mainly in China and India) out of deep poverty.

Globalization is resilient because it is powered by widespread self-interest. Early concerns about a 1930s-style trade contraction have receded: other leaders know their history and are reacting wisely.

It is the self-correcting forces embodied in global trade that mark the sharp difference between economics and security. The economic issues will recede in time. Security issues will become more acute.

It seems likely that China will continue to grow at around twice America's pace for the next decade or two. By that time its per capita income will still be only half America's, but its overall GDP will be twice America's. It is unlikely to remain content with its current limited global role.

There is much talk of the 'Thucydides trap', drawing analogies from ancient conflicts between Sparta and Greece. Japan's pre-WWII isolation offers a more relevant warning to those advocating economic 'decoupling' -- cutting China off from access to foreign markets and technology.

President Trump's wide-ranging focus on economics distracts us from sensible options to address security issues.

We should start by defining the security concerns more precisely. Is there technology which we don't want to share with China, for security reasons? This is quite separate from getting China to pay a fair price for intellectual property. These are secrets that we don't want to share, at any price.

Similarly with foreign investment, there will be areas where Chinese investment will be unwelcome. We should specify these and say why they were chosen. China, with its own obsessive security concerns, will understand. Some foreign joint ownership should be welcome as it gives the foreigners a stake in good relations but, where countries wish to prevent foreign domination of a particular industry they should have the right to impose limits.

Excluding Chinese products from security-critical infrastructure (Huawei from 5G telecommunications, for example) is similar. Security agencies should explain why they advocate this. Again, China will be annoyed but will understand because they do the same thing.

In all this, the objectives and priorities of Asian countries will differ from those of Trump's America. But that is acceptable. Sovereign nations must make their own choices -- and Asian countries must balance their China-linked and US-linked interests.

Moreover, economic policies can be deployed to enhance security, even when China is excluded from specific technology areas. In particular, Beijing should have incentive to participate in mutually beneficial collective endeavors, to increase the loss it would suffer from selfish actions. The Regional Comprehensive Economic Partnership and the 11-country successor to the TPP should not be judged simply against economic criteria. They could bind China into a common good and so makes all participants more secure.

In the Asia-Pacific, we should loudly support a greater Chinese voice in international forums such as the International Monetary Fund and World Bank, to engage China more deeply in multilateral endeavor.

Above all, we should raise our voices against Trump's America-First policies, not just because these are foolish economics, but because they harm our security through their divisiveness.

Stephen Grenville is a nonresident fellow at the Lowy Institute in Sydney and former deputy governor at the Reserve Bank of Australia.

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