Beijing and Washington have been engaged in long-standing negotiations to resolve an increasingly contentious trade dispute. It looks like we are approaching the endgame, but, as James Politi and Lucy Hornby report in the Financial Times, “the two sides remain apart on two key issues — the fate of existing US levies on Chinese goods, which Beijing wants to see removed, and the terms of an enforcement mechanism demanded by Washington to ensure that China abides by the deal.”
Assuming we resolve these final issues, what will the ultimate deal look like? Will it rectify lingering structural problems that have devastated U.S. manufacturing (with genuine enforcement provisions)? Or will the deal simply represent yet another faux bargain in which China essentially bribes U.S. officialdom via purchases of some additional soybeans and wide-bodied aircraft to make cosmetic reductions in Beijing’s bilateral trade surplus?
There’s no question that a simple restoration of the status quo ante would not constitute a trade win for the president by any stretch. That would be an epitomic case of “sound and fury, signifying nothing.” At the same time, it would be highly unrealistic to expect Beijing to eliminate its elaborate system of state subsidies for industry, the basis for its state capitalist growth model, which has accelerated China’s quantum leap up the technology curve.
In this regard, the president’s current trade representative, Robert Lighthizer, will play a crucial role in determining the outcome, although questions still linger as to whether he will ultimately be undermined by Trump in the latter’s quest to secure a win at any cost, especially if this ‘win’ comes with the usual pledges to purchase much higher quantities of American goods and nothing else behind it. By the same token, even if Beijing goes beyond that and pledges to open up more sectors of China’s domestic economy to U.S. investment, tighten laws on intellectual property, etc., such additional promises do not really help American workers (quite the contrary, if it means that companies like GM keep shutting down domestic facilities and making increasingly large bets on the Chinese market, as they appear to be doing already). Using Trump’s simplistic metric of success — the actual bilateral trade figures between the United States and China — investing more in China will not reduce America’s trade deficit with Beijing and, indeed, might add to it, as these Chinese-manufactured goods are re-exported back to the American market.
The granting of a “permanent normal trading relationship” (PNTR) and then the subsequent accession to the World Trade Organization (WTO) in 2001 have been a boon for China, but the persistence of ongoing American trade deficits have led many, including the current president, to judge the United States a loser in ongoing trade negotiations with Beijing. It’s not a totally irrational judgment: China’s WTO accession hasn’t been great for U.S. manufacturers.
Part of the problem stems from the extraordinary fact that Washington has seldom deployed a negotiator who is actually well-versed in trade issues. Since the days of the Clinton administration, it has been the U.S. Treasury Secretary, as opposed to the country’s chief trade representative, who has consistently directed trade negotiations, with the resultant (and eminently predictable) impact that financial interests have superseded those of any other economic sector. That pattern was briefly disrupted when President George W. Bush appointed Alcoa’s CEO, Paul O’Neill, to head the Treasury, and then CSX president John W. Snow, but ultimately the “Wall Street uber alles” mentality again prevailed with the appointment of Hank Paulson (to be followed by Tim Geithner, Jack Lew, and now Steve Mnuchin—all of whom have finance-centric backgrounds).
For all of the supposed financial sophistication of America’s Wall Street-based Treasury Secretaries, it is indeed ironic that China has consistently been able to play them for fools with the implied threat of its so-called “nuclear option,” a highly flawed narrative that alleges that as a final resort, Beijing would dump its huge stockpile of U.S. Treasuries, thereby driving up U.S. rates, and creating a catastrophic depression for the U.S. economy. That so-called threat to the bond market is the traditional reason why successive Treasury Secretaries have been hesitant to resort to the blunt trauma force of trade sanctions or tariffs when it came to negotiating with Beijing. They were also comforted by the idea that as it modernized, China would increasingly abide by traditional norms of free trade doctrine against all available evidence that shows that it has not played by the same rules.
Let’s leave aside the internal incoherence of the nuclear option: China exiting dollar-denominated assets could well create downward pressure on the external value of the free-floating currency. But that would enhance U.S. export competitiveness, assuming, of course, that America has anything left to export, an unfortunate legacy of the Treasury’s malign neglect of U.S. manufacturing. It’s also operationally wrong (see herefor further detail), and mistakenly assumes (against all historical evidence to the contrary) that Beijing would pursue an economic policy that is the functional equivalent of cutting its own nose to spite its face, as Paul Krugman, among others, notes.
Even if Paulson, Geithner, Lew, Mnuchin, etc., didn’t truly believe in the “nuclear option,” they have been happy to tamp down the possibility of a trade war in order to keep the capital markets stable. Each trade “deal” has therefore largely sustained the status quo, the price for which sees Beijing usually offering up a few well-timed purchases of soybeans or Boeing aircraft (although the latter will be more problematic in light of the 737 fiasco). But China’s policy makers have never been forced to deal with the economic consequences of their country’s mercantilism, which has resulted in the steady erosion of America’s Rust Belt, as the U.S. economy gave back the considerable employment gains it achieved during the 1990s, via a historic contraction in manufacturing employment.
Things have changed markedly since Trump seized the “China trade” portfolio from the Treasury’s Steve Mnuchin, and placed it under the control of Robert Lighthizer, the current trade representative. Unusually for a member of the Trump administration, Lighthizer actually knows his brief. He has had literally decades of experience in trade issues, dating from his days as a deputy U.S. trade representative in 1983 (when Japan was widely perceived as the main trade threat), to his current role as America’s chief trade negotiator. As Trump’s U.S. Trade Representative (USTR), he has provided policy flesh and bones to the president’s robustly unilateral approach in trade.
If anything, Lighthizer’s trade hawkishness has become even more pronounced over the years, as he has shifted his attention away from Japan to China. In his 2010 congressional testimony, he argued that U.S. policy makers gravely underestimated the threat posed to American manufacturing by virtue of China’s entry into the WTO, marshaling an array of evidence to cast doubt on the idea that its entry had brought any significant economic benefits to U.S. workers and businesses. He also highlighted the mercantilist nature of Beijing’s state capitalism and noted that the country’s administrative complexity likely precluded it embracing WTO rules, even if wanted to do so (which he doubted):
“As part of China’s system, specific large companies receive government patronage in the form of credit, contracts, and subsidies. The Chinese government, in turn, sees these ‘national champions’ as a means of competing with foreign rivals and encourages their dominant role in the domestic economy and in export markets…
“[S]cholars have questioned whether — given its lack of institutional capacity and the complexity of its constitutional, administrative, and legal system — China is even capable of complying with its WTO obligations.”
No doubt in thrall to the prevailing free-trade ideology, Washington’s “policy passivity” made it loath to use available tools such as the WTO’s “421” special safeguards to counter the resultant trade shock. In that same testimony, Lighthizer also signaled that he was uninterested in the niceties of WTO style multilateralism, more inclined to the use of “aggressive unilateralism” via executive orders, diplomatic pressure, and most importantly, the use of Section 232 of the 1962 Trade Expansion Act to levy tariffs on various products, premised on the notion that the targeted country (in today’s case, China) represented a national security threat.
Most significant from the Lighthizer perspective is an explicit rejection of the idea that China needs to do more than just buy more U.S. goods before the two countries strike a permanent trade deal, which in any case is highly problematic if the end objective is to bring the bilateral trade balance between the two countries to zero.
You can understand why. For one thing, the math doesn’t add up: even if China were to raise its agricultural purchases by $30 billion, as it has reportedly pledged to do, this is pretty small beer in the context of a $300 billion bilateral trade deficit. As the economist Brad Setser highlights:
“The scope for explosive growth in soybeans is actually fairly limited, as the pre-tariff base for soybeans [the number one or two largest U.S. export to China] was quite high — the United States was supplying $12 billion of China’s almost $40 billion in oil seed imports. A huge tilt away from Brazil might cause U.S. beans exports to double, but getting much more than that would be difficult (there is a natural seasonality to soybean trade that favors alternating supply from the Southern and Northern Hemispheres).
“The real growth would need to come in sectors where China doesn’t buy much now. Corn. Rice. Perhaps pork and beef… Getting really big numbers there though would risk pushing up U.S. prices, and getting China to abandon its goal of self-sufficiency in basic grains.”
So U.S. farm prices would be pushed up, which would hurt U.S. domestic consumers, even as it cosmetically dresses up America’s trade position vis a vis China.
“China has signaled it is willing to let foreign firms take majority stakes in a few more sectors, and has reiterated its belief that technology transfer isn’t a legal requirement for entry into the Chinese market. There are likely to be settlements on some long-standing disputes as well — the rating agencies have gotten approval to enter the Chinese market; Visa, American Express and Mastercard likely will finally get approval too (Mastercard through a joint venture… not everything changes); and some tariffs introduced as retaliation in the past may get dropped.”
But how does the entry into China of consumer credit card companies or the ratings agencies help Americans? Ironically, this looks precisely like the kind of sop to finance that Trump said he would eschew. However, because of corporate/Wall Street pressure, the Trump agenda pivoted a few months ago from selective decoupling and protection of American strategic industries to opening up China for U.S. investment and pushing China to treat American companies doing business in China more equally. That is why leading U.S. companies have become friendlier and increasingly less critical of the president’s trade policy, even as the economic commentariat has continued to blast him.
Trump himself needs to understand that a third to a half of ‘trade’ is really transnational production with inputs from suppliers coordinated by mostly third-party manufacturers in Asia (notably in semiconductors). The purpose of modern mercantilism (particularly as it is practiced in China today) is not just to sell more finished goods but to try to monopolize the high value added rungs of supply chains. It is unclear that targeting China’s bilateral trade surplus with the United States will ultimately disrupt these entrenched supply chains. It almost certainly won’t bring semiconductor manufacturing back to America’s shores.
In the end, therefore, pushing China’s leadership to make structural changes to open up China to American companies is probably an illusion. Beijing is unlikely to rip up the model that has seen it create national champions that can now compete successfully with America’s biggest corporations. It may make token promises to curtail cybertheft, or the subsidies that the administration complains create an uneven playing field for American companies. But, as noted above, even Lighthizer himself has cast doubt that Beijing could enforce those promises, given the administrative complexity of its system of governance. In his eagerness to claim a win, therefore, Trump ironically might end up settling for the usual Faustian bargain: more large Chinese purchases, selective decoupling of supply chains (as American companies rethink their reliance on China), and increased domestic protection for certain sectors (such as 5G) on national security grounds, Lighthizer’s considerable efforts notwithstanding. We may have reached the peak as far as this particular tariff war goes, but the longer-term trade tensions will almost certainly persist well beyond this hollow ‘victory,’ which Mr. “Art of the Deal” will no doubt claim for himself when the negotiations do officially end.