America holds the best cards heading into China trade talks

President Trump’s top trade advisers are traveling to China this week to try to wrestle a better deal for the United States from their counterparts in Beijing. At the top of the list of U.S. demands are more protections for American intellectual property, lower tariffs on American exports to China, and a reduction in the bilateral trade deficit that topped $375 billion last year. Lost in the bluster and threats of retaliatory tariffs is some good news, which is that trade between the United States and China is healthy, and we come to the negotiating table with a strong hand.

The U.S. representatives should keep several basic facts handy in their crib notes. The first reality that should guide the talks is that China’s appropriation of intellectual property, while a real problem for some American firms, is not an existential threat to the United States. Claims that China’s intellectual property practices are costing the United States as much as $600 billion a year are ridiculously exaggerated. American companies are losing potential revenue from the lack of intellectual property protection, but they are still profiting overall from their investments in China.

{mosads}In fact, China has improved its intellectual property protections in recent years. Prompting reform have been its membership in the World Trade Organization, complaints from trading partners, and its self-interest in attracting foreign investment and promoting domestic innovation. According to Nicholas Lardy of the Peterson Institute for International Economics, “China’s payments of licensing fees and royalties for the use of foreign technology have soared in recent years, reaching almost $30 billion last year, nearly a four-fold increase over the last decade.”

China now ranks fourth in the world in the amount its companies pay to acquire foreign technology. Its protection of intellectual property falls far short of U.S. demands, but its regime is typical for a less developed country. In its annual rankings of intellectual property protection, the U.S. Chamber of Commerce ranks China in the middle of 50 major trading nations. While far behind the United States and other Western nations, China’s index of international intellectual property protection puts it behind Mexico and just ahead of Turkey. Ranking well below China are other major U.S. trading partners such as Russia, Brazil and Thailand.

Second, the U.S. delegation should remember that the $505 billion in goods Americans imported from China in 2017 are a blessing, not a problem. Although a small and declining fraction of American workers are dislocated by import competition from China, a large majority of Americans benefit as consumers. More affordable household goods such as clothing, footwear, appliances and other goods allow lower-income households to live better lives on limited budgets.

Imports from China have leveled off in recent years as a share the U.S. economy. In fact, imports from China as a share of gross domestic product have averaged a steady 2.6 percent since 2011, which is normal. There is nothing amiss with the fact that Americans spend less than 3 percent of their income on products put together in a nation with 20 percent of the world’s workers. Moreover, the trade deficit with China is the wrong metric with which to judge our commercial relationship.

When not buying U.S. goods or services, the Chinese are investing in the United States. When the Chinese buy U.S. Treasury bills, they help to keep long-term interest rates lower than they would be otherwise. This reduces interest payments for every American family with a mortgage. It also saves the U.S. government tens of billions of dollars a year on interest payments on the rapidly mounting national debt. This makes it easier for the U.S. government to fund its military and other essential services.

A final reality hanging over the talks is that China’s economy faces long-term headwinds that no central planning can fix. China’s one child policy has led to a plunging birthrate, a shrinking workforce, and a rapidly aging population, imposing enormous costs on the Chinese economy in the coming decades. Adding to China’s burden are its inefficient state-owned enterprises and a financial system threatened by bad debt.

Trump administration officials have raised the alarm over China’s plans to promote such cutting edge industries as electric cars and artificial intelligence. These fears ignore the inherent advantages of America’s more flexible, innovative and free economy. If the past few decades have taught us anything, it’s that free markets outperform central planning.

U.S. negotiators should press China for protection for intellectual property, lower trade barriers, and market reforms. But we should not surrender our inherent advantages as an open and prosperous society that gains far more than it loses from international trade.

Daniel Griswold is a senior research fellow and co-director of the American Economy and Globalization Program at the Mercatus Center at George Mason University. You can follow him on Twitter @DanielGriswold.