The Chinese government has deployed strategies that help its state owned companies acquire state-of-the-art technologies in order to break into global markets. By leveraging the country’s low labor cost China exports more than $2 Trillion of goods a year (in 2018 the U.S. imported over $419 billion more goods from China than it exported to China). The Chinese government ‘tolerates’ foreign organizations only if they bring value to the country. Local goals and culture will always act to circumscribe the freedom of foreign operations. It’s a ‘CHINA FIRST’ mentality. In the past, State owned enterprises, such as aerospace and defense conglomerates Aviation Industry Corporation of China (AVIC), Commercial Aircraft Corporation of China, Ltd. (COMAC), and rail rolling stock manufacturer CRRC were unable to compete technologically in Western markets. Multinationals who wanted access to the Chinese market were forced to form joint ventures with China’s state owned ‘national champions’ and transfer the latest technology in exchange for current and possible future business opportunities. It’s remarkable how aggressively China applied these policies, how many of its agencies are involved, how quickly and radically it changes the rules, how many unique technology and product standards it tries to impose, and how subtly its regulations violate the spirit, if not the letter of Western multilateral cooperation and agreements. Companies that resist are simply excluded. China’s goal is clear. To induce foreign organizations to transfer technologies that state-owned enterprises need to catch up with the West.

The result? China and the U.S. are structurally prone to economic conflict. Because of China’s history, economic and political system and Government policies, the country differs radically from the U.S. in its beliefs, expectations, and objectives. China regards the management of trade and investment flows as a legitimate path to global leadership. The U.S. believes otherwise. Attempts to connect these two very different systems have exposed and reinforced imbalances rather than brought equilibrium. Access to U.S. markets and technology has built the Chinese economy. Until now China has cajoled, co-opted, coerced, and taken Western technology with the intent of enabling it to supplant the U.S. as the world’s most advanced economy.

Together the U.S. and Chinese economies account for 40% of global GDP. The goal of tariffs (on both sides) is to apply pressure to exporters who will turn this ‘economic’ pressure into ‘political’ pressure. Tariffs are a short term approach that will cause traffic flows to change and prices to reset in the U.S., China and elsewhere. Long term a centrally planned economy has an invisible cost – government inefficiency. Without the profit motive there is no incentive to carve out niches, to differentiate products, to search for continual improvement in the production process, or to dream up new ideas. In the short run China’s approach has worked to advance its interests. But now conflicting national interests are working to overwhelm the benefits of cooperation. In the current environment of growing strategic competition, it would be useful to recognize we cannot expect an economically compatible relationship with China. Clarifying and understanding China’s strategy will brighten the lines we simply should not allow China to continue to cross.

Similarly, investment management demands a clear understanding of goals and objectives. In Air and Rail, play the long game. Call RESIDCO.

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