Forget Marco Polo!

 
By the EACC Network 
(Amsterdam, Brussels, Carolinas, Cincinnati, Lyon, New York, Paris, Princeton, Rome, Toulouse)
 
“I look around my house, and everything but the kids and dog was made in China” (P.J. O’ Rourke)
 
The big picture of the world economy today is fairly straightforward. With Japan fading away and India still sputtering, three blocs jump out: the US, Europe and China. The US and Europe together represent, roughly in equal parts, 10% of world population, 50% of GDP and 30% of trade. China accounts for 20% of population, 12% of GDP and 15% of trade.
 
The trade numbers are well-known. Both the US (#1) and the EU (# 2) do well in the trade of services, with China a distant laggard. The trade in physical goods, however, paints a very different picture. On a global basis, the EU’s balance is roughly breakeven but with China alone the deficit reaches almost $ 200 billion. The US runs a whopping $ 800 billion deficit ($150 MM with the EU, $ 380 MM with China). China unabashedly flaunts a $ 420 billion surplus.
 
Both the US and the EU have a problem with China, but they don’t have a problem with each other. The services balance is in favor of the US and the goods numbers are the result of fair competition and market forces. BMW and Daimler have solid market shares in the US because they make good products that American consumers like. No dumping here (both companies are very profitable) and no room for the mediocre or half-hearted, as evidenced by the resounding failures of Renault and Peugeot in the US. Similarly, Caterpillar, Black & Decker or Benton Dickinson have conquered market shares in the EU fair and square at the expense of European competitors. By the same token, GM’s and Ford’s misfortunes in Europe were the verdict of free-market consumers, not government-inspired protectionism.
 
Free trade is the very foundation of both the US and the EU. Demanding free international trade for the thirteen colonies was a key factor in triggering the Revolutionary War against England. Keeping the ship-builders of the North and the tobacco growers of the South as one economic and trade entity, domestic and international, was a major concern of the Founding Fathers. The EU is also defined almost exclusively by free trade in the glaring absence of political union. The free trade area is a spectacular success and even political absentees (Norway, Switzerland, and presumably post-Brexit UK) enjoy its benefits. Similarly, according to Forbes, of all automobiles sold in the US, the car with the most US content is …the Toyota Camry with European makes in hot pursuit. The free flow of merchandise, services, people and ideas helps us (Americans and Europeans) stay five times richer per capita than world average.
 
Consider BMW, its South Carolina plant is the largest BMW facility in the world: further 70% of all BMW’s made at the plant are exported which makes BMW USA the largest exporter of autos in the US. Think of that BMW exports more cars than GM or Ford or Chrysler/Fiat!!. In 2017 237,000 BMW X models with a value in excess of $8 billion were exported to over 100 foreign counties. This makes it clear that a label can be deceptive and constructive trade relations can have positive results for all.
 
Seminal to this prosperity, the playing field has been level between the US and the EU, as befits democracies. Not so with China, a highly respectable but undemocratic country that vividly remembers its past as the world’s biggest economy in the Middle Ages as well as the humiliations at the hands of Western countries in the 19th century (some signposts in the international sections of Shanghai would read “No dogs or Chinese allowed”). Initially (but no longer) based solely on cheap labor, exports have been the weapon of choice in China’s economic rebirth in the last few decades. Consider this: in 1960, exports were only 4% of the Chinese economy, today they account for almost 30%. Back in the 1980’s, the 1,400 million continental Chinese exported less than their 20 million ethnic cousins in Taiwan. While the latter remains a formidable powerhouse, China today exports seven times more goods than the tiny island that showed them the way.
 
In contrast to other Asian countries, though, Chinese exports are not governed by independent companies going to market for maximum shareholder return. They are part and parcel of a national strategy laid out by the Party with the primary goal of generating enough growth to maintain employment and keep the populace quiet (it is generally estimated that China needs 7-8% growth to achieve these goals). As long as GNP growth is export-led, this clearly poses the problem of fairness of competition with Western companies that bear the brunt of the assault.
 
One aspect is exports per se, and there does remain a problem with China dumping goods into the US and Europe. While exports have moved toward more sophisticated products over time, a substantial chunk of exports is still generated by money-losing SOE’s (state-owned enterprises) that sell under cost and only survive because they’re part of the murky SOE-national banks-government complex. More preoccupying, however, is the fact that there is no such thing as a level playing field for imports and foreign firms in the Chinese market where foreign firms are subjected to ruthless discrimination in terms of access to market, business law, labor costs, as well as being forced to hand over their intellectual property as a price of admission. Very few Western firms have succeeded in dominating the Chinese market and that only in areas not deemed strategic by the government (Wrigley’s chewing-gum is okay) or with a “recommended” local partner whose assignment is to suck off your technology then kick you out.
 
Of course, our relationship to China is not just trade and business. Many political factors weigh in (North Korea, Taiwan, South China Sea, Russia, etc.), and we at EACC don’t do politics. Our key message is that the US and the EU have no reasonable quarrel with each other. On the contrary, European and American interests are very much aligned and our full combined weight is a formidable weapon to convince China to toe the line. Europe must rise to the challenge, Brussels and Washington must move in lockstep with common resolve. This is a complex but necessary endeavor.
 
“United wishes and good will alone cannot overcome brute facts” (Sir Winston Churchill)