The Impossibility of Enforcing China’s Trade Commitments

Last week’s trade talks in Beijing achieved some progress. An experienced U.S. delegation led by Deputy U.S. Trade Representative Jeffrey Gerrish and Commerce Under Secretary Gilbert Kaplan agreed to an extra day of meetings — a sign that the talks were “serious,” according to China’s foreign ministry.

But the United States still has major concerns regarding China’s forced technology transfer, intellectual property theft, non-tariff barriers and cyber hacking. And even if an eventual deal can be reached to lift U.S. tariffs, it’s questionable whether the United States could ever adequately penetrate the murky world of China’s many state-owned enterprises.

Take the practice of forced technology transfer, which compels U.S. firms to share proprietary technology in exchange for access to China’s consumer market. Beijing says it’s considering legislation to ban such practices.

But China’s ruling regime has also maintained that there is no forced transfer policy. It’s hard to end a practice that allegedly doesn’t exist.

There’s certainly pressure on U.S. negotiators to forge an agreement with Beijing. Wall Street wants to calm investors and assuage fears of a wider trade conflict. But President Donald Trump is operating from a position of strength by maintaining tariffs on a wide swath of China’s exports.

Relenting on the tariffs would mean yielding the very leverage that has legitimately brought Beijing to the table for the first time in many years. And it’s doubtful that the United States could truly convince China to move away from the authoritarian, nationalistic path it has steadfastly followed for the past 20 years.

Here’s the problem: Any agreement will inevitably falter on the impossibility of adequately monitoring and enforcing China’s obligations. And Beijing’s track record since joining the World Trade Organization in 2001 already makes it clear that it considers rules to be optional. The currency manipulation alone that China has casually employed over the past two decades — in complete violation of its WTO and International Monetary Fund obligations — is more than enough to demonstrate a rather fearless disregard for the rules of the global trading system.

More specifically, enforcement requires a distinction between Beijing’s centralized government and the many state-owned enterprises that currently benefit from its massive subsidies and other predatory practices. It’s laughable to believe that the same government that aspires to lift China above all other nations would willingly restrict the very entities that are driving its industrial rise.

And even if Beijing makes a show of following new trading rules, will the ensuing punishments be of any utility? Chinese firms currently hack U.S. companies with impunity. And the rewards are staggering — as evidenced by China’s $135.4 billion advanced technology products surplus with the United States in 2017.

Beijing could certainly penalize its domestic companies with fines. But a slap on the wrist matters little compared with massive trade flows that keep generating huge annual trade surpluses.

Realistically, much of what concerns the United States is outside the scope of feasible legal enforcement. It’s simply impossible to police the nebulous world of China’s byzantine and interconnected entities.

Beijing already has a shadowy track record on high-tech theft. U.S. officials will be hard-pressed to monitor the technology that gets shared each day between various state-owned enterprises.

The bottom line is that China has built its rise on acquiring technology from U.S. firms through stealth and outright theft. And even if blatant theft were no longer “permissible” under a new trade deal, there’s still little reason for Beijing to cast aside the spying, reverse technology formulations and hacking that keep driving its high-tech industries to the pinnacle of the global economy.

President Bill Clinton promised that an opening of China’s markets would bring greater transparency and more export opportunities for U.S. manufacturers. That didn’t happen. President George W. Bush advocated a free-trade approach to China, believing that Beijing would gradually move toward more open markets. That didn’t happen. President Barack Obama assumed that America’s trading partners could form a bulwark against China’s military expansion. That didn’t happen.

Trusting Beijing to police itself in the name of open trade is naive and short-sighted. The only tangible sign of progress would be China actually purchasing significantly more U.S. exports. But even then, the United States must maintain steady pressure.

The only realistic means to achieve balanced trade with the People’s Republic would be for Washington to use its one true lever — access to America’s consumer market. Meaningful enforcement is unrealistic, and so the United States must continue to limit Chinese imports. Guarding access to the U.S. market is the only means to counterbalance China’s rise and ensure America’s own industrial and economic security.

Dan DiMicco is the former CEO and chairman of Nucor steel company, and he served as a trade adviser to Donald Trump during the 2016 presidential campaign and is currently chairman of the Coalition for a Prosperous America.

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