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U.S. trade talks with China face a fundamental problem. The two countries are negotiating to end a trade war. It was triggered by President Trump's demand for better terms. Now, it's easy for the Chinese to, say, promise to buy more U.S. goods. They've got the money. But it's hard for China to alter a basic fact of its economy. Unlike the U.S. government, China's government owns half the country's largest companies, and many receive big subsidies. That is the advantage the United States wants China to give up. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: Michael Korchmar runs a company that makes travel bags and briefcases. It's been in his family for four generations. Over the years, he has watched one company after another in his field go out of business. And for those that survive...
MICHAEL KORCHMAR: Oh, that means you lose. I lived it. We lost. We had, you know, 500 people employed in the U.S. And we went down to five.
ZARROLI: Korchmar says a big problem for companies like his is brutal competition from Chinese rivals. He says they can undercut his prices because they're subsidized by their government. And this is at the heart of the current trade talks - the extent to which China props up its companies. Just last week, Massachusetts Congressman Richard Neal, who heads the powerful House Ways and Means Committee, spoke about it.
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RICHARD NEAL: The China that we trade with and compete with today is very different from the one that we had hoped would emerge. China's economy, which has taken on some market characteristics, remains fundamentally state-directed.
ZARROLI: More than half of China's biggest companies are owned by the government. They include essential sectors like railroads, energy, shipbuilding and telecommunications. But government officials also maintain strong ties to private companies, says Jennifer Hillman of Georgetown University Law Center.
JENNIFER HILLMAN: They're able to direct resources and push resources into those industries and those entities that they are trying to favor.
ZARROLI: Hillman notes that Communist Party members sit on the board of virtually every big Chinese company. The four largest banks are controlled by the government. Mark Wu of Harvard Law School says even when a Chinese company is privately owned, it works hard to stay in Beijing's good graces.
MARK WU: People understand what the objectives are, and they'll operate within those confines. It's especially true when the state asserts a strong enough control over the key elements of the economy, as the Chinese economy still does.
ZARROLI: It wasn't supposed to be this way. When China joined the World Trade Organization in 2001, it agreed to reform its system to become more free market. But Patrick Chovanec of Silvercrest Asset Management says events of the past decade have made China more confident about its own system.
PATRICK CHOVANEC: In the wake of 2008 financial crisis, China took a different look at what its economic model should look like. And a model that was more state-driven looked a lot more attractive to them.
ZARROLI: Under President Xi Jinping, the government's role in the economy has only gotten bigger. U.S. officials say these policies violate the spirit if not the letter of trade law. And they've pressed Beijing to stop subsidizing businesses. But the ties between the government and business in China can be opaque. Chovanec says Chinese officials know how to give preferential treatment to their own companies at the expense of outsiders without leaving their fingerprints anywhere.
CHOVANEC: They will just say, well, there's a slowdown in inspections of this type of product from your country. It's for safety. It makes it hard for you to then turn around and say, OK. You're engaging in illegal activity because there's complete deniability.
ZARROLI: Harvard's Mark Wu says the Trump administration needs to be realistic about what it can achieve.
WU: To the extent that we're expecting major fundamental structural reforms, that's going to be very difficult to obtain because they see this governance structure as having been vital for both their political and economic successes.
ZARROLI: Wu says China believes its economic model has served the country well. And it's not going to give it up easily. And that means U.S. trade negotiators have their work cut out for them. Jim Zarroli, NPR News.
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