US must confront China to achieve 4 percent growth

Peter Morici

So far, the Trump economy is a resounding success. Unemployment is down, wage gains are stronger and stocks are setting new records, but a lot more than tax and regulatory reform will be needed to deliver the economic growth Americans should expect and deserve.

The IMF predicts 2018 will be a banner year for global growth – 3.7 percent – but the U.S. economy is predicted to post 2.3 percent. Tax cuts will help – the one-time boost in household income and consumer spending should add half a percentage point to GDP for a year or two – and a 20 percent reduction in business taxes should permanently boost investment and growth to around 2.6 percent.

China continues to report official growth numbers better than 6.5 percent and though western analysts raise questions about exaggerated statistics, even critics concede the Middle Kingdom is accomplishing at least 4 percent growth. That is the figure America must match or indeed beat.

China’s Communist Party is touting a better model for progress. As western democracies remain mired by divisive infighting, indecision and slower growth, its state-directed capitalism is taking aim at the industries of the future – technology products, artificial intelligence and electric vehicles.

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We can no longer dismiss China’s significantly stronger growth merely to the dividend gained when a formerly closed economy opens to trade and absorbs western technology. China is on an enduring superior growth trajectory – its export industries and investments in urban infrastructure, manufacturing and worker productivity often match or exceed many western nations, even if its rural areas still lag for now.

Asian nations and the more troubled regions of Europe are taking heed and questioning whether liberal democracy, free-market capitalism and open globalization will best accomplish national security and prosperity.

For example, the Czech Republic is in the process of forming a new government that would give broad executive powers to its new prime minister – a man with very unfriendly ideas toward the EU and the West generally, and whose goals generally mirror troubling developments in critically strategic NATO ally Turkey.

With a population more than four times larger, it is inevitable that China will have a bigger economy than the United States. Maintaining American technological superiority and at least matching Chinese growth will be absolutely necessary for ensuring the United States can make democracy attractive around the world. And that it has the military and counter-insurgency assets necessary to deal with challenges from China, Russia, Iran and terrorism that will continue after ISIS’ final demise in Syria and Iraq.

China’s game plan is methodical and well-disciplined – close markets to imports with high tariffs and administrative controls, force foreign companies to transfer critical technology for the privilege of producing in China to access its domestic market, subsidize exports with never-repay loans from state-owned banks, and use the proceeds from the resulting trade surpluses to buy up western companies developing other critical technologies.

That is not how trade and investment among WTO members is supposed to work, and the Trump administration strategy of bargaining with China industry by industry – for example in beef, credit cards and solar panels – is like chasing an infestation of rats with a hammer.

Decades of bilateral talks – like those launched by Presidents Trump and Xi Jinping at Mar-a-Lago in April – have proven nearly worthless. The trade deficit with China is on track to exceed $330 billion in 2017, up from $309 billion in 2016.

Either China commits to opening up its markets to U.S. goods and investments on a fully reciprocal basis and balancing bilateral trade over three years, or the United States should unilaterally impose a system of import licenses. Exporters should be granted transferable rights to import equal to their sales in the Middle Kingdom, and the United States should limit Chinese investments in sectors of the U.S. economy to mirror restrictions imposed by Beijing on western investments.

After that if China wants to talk more – fine.

The boost in the demand for U.S. made goods and services and investments in U.S.-based production and intellectual property would easily exceed those from the tax cuts and boost growth by 1.5 percentage points – enough to get America growing at 4 percent again.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2017, The Washington Times.