Opening-up leads to a competitive but richer world

China's economic strategy will focus on creating a highly competitive domestic market, high-value goods, high wages

China is in the midst of implementing a host of reforms, which are focused on opening up its economy to foreign competition and strengthening its private sector. They are needed to upgrade its industries and avoid the dreaded middle-income trap.

Many of these reforms are exactly what the United States is asking for in the trade negotiations, but China is actually pursuing these reforms primarily to achieve its own long-term internal economic goals.

One standard goal is to create a "level playing field" so that foreign companies can compete against domestic companies in each country.

In the past several months, China has announced and started to implement a "negative list" program that allows foreign companies to have 100 percent ownership in investments in all areas of the economy, except for a small number of areas, such as telecoms and defense, that are explicitly prohibited.

Also, foreign investment has been simplified by creating a one-stop regulatory shop and a single application process.

These new policies will lead to greater competition within China, forcing China's companies to become more efficient and to produce higher quality products.

The Chinese government has also recently announced tax cuts and financial regulations designed to help private companies. This will hasten the ongoing transition to a market-driven economy.

Most Chinese State-owned enterprises are not relevant to trade negotiations. Many are in non-tradable sectors such as property development, infrastructure, or concrete. Others are basically public utilities in telecoms or power.

Some Chinese car companies are State-owned, usually by provincial governments, but the car business in China is very highly competitive and foreign brands are very successful.

In any case, the continuing growth of an already large private sector should alleviate foreign concerns about competing with State-owned companies.

During the George W. Bush administration, the US imposed tariffs on Chinese steel, arguing that State-owned companies had an unfair advantage. But, US steel companies also face higher costs because of increased environmental protection. China's current emphasis on building an "ecological civilization" means that that kind of polluting heavy industry will be less viable.

China has also recently announced a strengthened regime of intellectual property rights protection. Again, this is what foreign negotiators are seeking, but also is important for China's own economy as it transitions to being a technology leader.

Trade agreements can affect the types of goods being traded and they can redirect trade toward one country, away from others. They cannot directly affect any country's worldwide current account balance. A country that saves less than it invests will have to borrow foreign funds to import foreign goods to make up that difference.

There are two ways to reduce the US trade deficit. A serious recession would reduce investment, but nobody advocates that as a strategy. The only other path is to change the US financial and government system to encourage increased savings. China has almost nothing to do with it.

Ironically, the disputes between the US and China center around both nations' legitimate desires to protect some current low-skilled jobs, or at least to allow an easier transition to new jobs and industries.

US administration's economic policy has rightly focused on the need to retain jobs for working-class people in the US. And, China's companies that export to the US also largely now employ less-skilled working-class people. However, neither the US nor China can expect to keep, much less get back, low-wage, low-skilled manufacturing jobs.

Many people have the impression that Chinese goods are dominant in US markets. That is true only in a few highly competitive, low-profit sectors. According to US Commerce Department data, China has more than 50 percent of the US market in such items as umbrellas, toys, prepared feathers, footwear, straw products, and bedding.

Chinese exporters have from 20 to 50 percent of the US market in other low-value-added markets, plus electrical machinery and equipment, mechanical appliances, and iron and steel. In most other categories, China has less than 20 percent of the US market.

China also assembles and then exports a lot of phones, computers and other gadgets to the US. But, most of the profits and wages go to Japanese or South Korean component producers or US-based designers. For example, China makes less than $9 from each iPhone. The total price of a phone is ridiculously counted as a Chinese export to the US.

It's a good thing that China is no longer a low-wage country. Most Chinese are much better off than they were even 10 years ago. But it does mean that these low-skilled, labor-intensive industries will be moving to less-developed nations. US tariffs on such products will only serve to hasten the transition to higher value-added industries that China has to make anyway.

Roughly 20 years ago, when China's admission to the World Trade Organization was being negotiated, China's economy was tiny as a portion of world GDP. It was clearly a poor, less-developed country that, except in a few areas, was not able to compete with Western companies in high-value-added products.

As Alexander Hamilton, the first US Treasury secretary, argued, a developing country may need to protect its "infant industries" from already established foreign competitors. This was the policy followed by the US in the 19th century and by Western Europe, Japan, and South Korea in the years after World War II.

China is no longer a poor country. It can no longer compete by using low-wage labor. Fortunately, it has now developed world-class companies that are increasingly developing new products and services that can compete successfully in many foreign markets.

Now that it has reached middle-income status, China's economic strategy will focus on creating a highly competitive domestic market that forces companies to produce high-value goods so they can pay high wages to highly skilled people.

Because of its long experience in manufacturing, much of that push will be focused on higher value-added production, using the new technologies of robotics, artificial intelligence, the internet of things and 5G. This is the only way to avoid the middle-income trap.

The reform and opening-up policies are exactly the kinds of market-driven reforms needed to make this happen. The Chinese government is investing heavily in research and development, but it should be noted that the R&D spending as a percentage of GDP is still lower than that of the US.

Nobody likes competition against themselves. So, it must be admitted that China's transition to a high-tech, high-value-added economy will come as a shock to many companies around the world. The US economy, which has about 7 percent of GDP in high-tech manufacturing, will be lightly affected by this change.

On the other hand, advanced manufacturing contributes around 20 percent of GDP in South Korea, Japan, Germany and a few smaller European countries. They will be much more directly affected.

China's transition over the next 10 years will not be painless for its companies or for foreign competitors. But, reform and opening-up policies that create more competitive companies and markets are the only way to achieve a richer and more productive world economy in the long term.