We’ve been observing the ebb and flow of trade negotiations between China and the United States with anxiety, hope and curiosity.

The “trade war” has been one of the most important influencers of markets this year and will likely continue to be in 2020.

An agreement could greatly benefit both countries, but it’s not surprising a deal hasn’t been reached, as both sides want more than the other side is willing to give.

There is much at stake, as the two countries have the world’s largest economies.

“The U.S. has retained its position of being the world's largest economy since 1871,” according to Investopedia. “The size of the U.S. economy was at $20.49 trillion in 2018 in nominal terms and is expected to reach $21.35 trillion in 2019.”

China’s nominal gross domestic product (GDP) is $13.41 trillion, making it second to the United States, but its GDP based on purchasing power parity (PPP) is $25.27 trillion, exceeding that of the United States. Then again, China is known for exaggerating its growth, so the numbers may not be accurate.

With a population of 1.43 billion people, compared with about 329 million in the United States, China has a population that’s more than four times the size of the U.S. population. American companies that need to continue growing have become dependent on the world’s largest consumer market. China, meanwhile, needs America’s technology and innovation.

Capitalism vs. socialism

Capitalism has given the U.S. economy a huge advantage, in spite of China’s vast population, while communism has held back Chinese economic development. That’s changed significantly over the past 50 years, as the Communist Party began to lift some state controls to save China’s failing economy after the death of Communist Party Chairman Mao Zedong.

While 45 million people starved to death in China between 1958 and 1962 under Mao, China’s decision to de-collectivize agriculture enabled the country to feed itself.

Under Deng Xiaoping, who led the People’s Republic of China from 1978 to 1992, China adopted “socialism with Chinese characteristics.” The country became open to foreign investment and permitted entrepreneurs to start their own businesses, even as most industry remained state-owned.

During the late 1980s and 1990s, China privatized some businesses, contracting out much of what had been state-owned industry, and lifted price controls and many regulations. As a result, by 2005 the private sector accounted for about 70% of China’s GDP.

From 1978 until 2013, unprecedented economic growth occurred, averaging 9.5% a year, even though Deng’s successor Hu Jintao reversed some reforms and regulated business more heavily.

Meanwhile, since the 1960s the U.S. economy has increasingly become more of a mixed economy with increasing government regulation. The government, for example, subsidizes and provides tax incentives for some businesses, while requiring many businesses to be licensed and to meet regulatory requirements that slow growth.

China’s relationship with free-market economics has been a rocky one, but today China is the world's leading exporter. And, for the first time, Chinese businesses outnumber American businesses on Fortune’s 2019 Global 500 list, which ranks the world’s largest companies based on revenue.

Slowing growth

Still, economic growth in China fell sharply during the last years of President Hu’s leadership and GDP has continued to fall under China’s current leader, President Xi Jinping. While 3% growth is good in the United States, recent growth of 6.4% in China is considered insufficient, because China is a developing country and has a lot of catching up to do. In addition, one study shows that China exaggerates its growth by about 2% a year.

One reason economic growth is slowing is that the government is still heavily involved with Chinese businesses. Another is that economic growth depends on consumers. When their income increases, they are able to buy more, which causes GDP to increase.

While living standards have improved in China, they are still far behind those in the United States. Gross national income per capita was $16,760 while it was $60,200 in the United States as of 2017, according to the World Bank. In other words, in spite of tremendous growth over the past 50 years, per capita income is 359% higher in the United States than it is in China.

Can China be trusted?

However, President Xi is seeking to Make China Great Again. Its technological abilities are advancing rapidly and have resulted in China becoming a leader in quantum research. It just rolled out the world’s largest 5G network. It has created a floating solar power plant and the world’s most powerful high-powered supercomputer. It is the first country to land a discovery probe on the far-side of the moon.

A trade agreement with the United States would help President Xi accelerate economic growth, boosting the economies of both countries — but can China be trusted to honor an agreement? Not based on its record. Consider just some of the evidence.

Intellectual property theft. China’s technology theft and other unfair business practices are costing the American economy hundreds of billions of dollars a year. A 2017 report by the National Bureau of Asian Research estimated that “the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software and theft of trade secrets and could be as high as $600 billion.”

A U.S. Department of Justice report to the Senate Intelligence Committee claimed that “from 2011-2018, more than 90% of cases alleging economic espionage by or to benefit a state involve China,” Forbes reported, “and more than two-thirds of the department’s theft of trade secrets cases have had a nexus to China.”

China also steals research from American universities and has established “talent programs” to identify and recruit people who can steal technology for China.

Hacking. An investigation by NPR and “Frontline” found that three consecutive administrations have failed to stop cyber-hacking by China because the companies being hacked don’t want the government to interfere.

Chinese hackers “were really using a large rake — think of a rake [like] you rake leaves in the fall,” U.S. Attorney David Hickton said. “They were taking everything ... personal information, strategic plans, organizational charts. Then they just figured out later how they were going to use it.”

None of the targeted companies wanted to investigate or take legal action, because they have too much money at stake in China.

Torture. The Chinese government has created concentration camps for an estimated one million Uighur Muslims.

“As evidence mounted and governments around the world started to find their voices, the Chinese Communist Party stopped denying the existence of the camps,” according to The Sydney Morning Herald. “Instead, this year it launched a sanitation and propaganda campaign to present the camps as cheerful vocational education centres where Uighur people could choose to go to study useful skills.”

In reality, though, Uighurs are imprisoned, tortured or killed, and forced to forgo their religious practices and their ethnic culture.

Organ harvesting. Both Uighurs and Falun Gong practitioners, as well as other political prisoners, are routinely executed “on demand” and their organs are harvested for transplant recipients.

“Several researchers … estimate that tens of thousands of Falun Gong prisoners of conscience have been killed to supply a lucrative trade in human organs and cadavers and that these abuses may be ongoing,” according to Wikipedia.

Lying. China’s Communist Party routinely blames Western powers for thwarting the peaceful rise of China. State media reports are filled with accusations blaming the “black hands” of the CIA and other Western intelligence services for causing unrest in Hong Kong.

Murder. President Xi “has purged countless bureaucrats and dispatched rivals in a broad anti-corruption campaign that has disciplined more than 1.5 million officials,” according to The Washington Post.

Enslaving Chinese people. President Xi has practically absolute power. He even removed term limits, so he can rule indefinitely.

China has the world’s largest and most sophisticated online censorship operation. President Xi is seeking to make China’s internet separate from the internet for the rest of the world, with its content closely monitored and managed by the Communist party.

China has become a leader in facial recognition software and is developing a system with the goal of being able to identify any of its 1.3 billion citizens within three seconds with about 90% accuracy.

And there’s more

We haven’t even mentioned the crackdown on Hong Kong, Tiananmen Square or China’s growing military strength.

While China publicly suggests that it has a small arsenal of nuclear weapons, Mark Helprin recently questioned in The Wall Street Journal why the country needs a 3,000-mile tunnel system to store them.

China has taken over control of the South China Sea by building out shoals and reefs into islands and locating military bases on them.

We hope the United States is able to reach a trade agreement with China that will benefit both countries. But we wouldn’t trust China to honor the terms of whatever agreement is reached.
