This is the big illusion Trump is trying to create with his China trade war
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, âthe two sides remain apart on two key issuesâthe 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.â
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 Beijingâs bilateral trade surplus?
Thereâs 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 âsound and fury, signifying nothing.â 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 Chinaâs quantum leap up the technology curve.
In this regard, the presidentâs 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 latterâs quest to secure a win at any cost, especially if this âwinâ 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 Chinaâs 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 Trumpâs simplistic metric of successâthe actual bilateral trade figures between the United States and Chinaâinvesting more in China will not reduce Americaâs 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 âpermanent normal trading relationshipâ (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. Itâs not a totally irrational judgment: Chinaâs WTO accession hasnât 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 countryâs 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 Alcoaâs CEO, Paul OâNeill, to head the Treasury, and then CSX president John W. Snow, but ultimately the âWall Street uber allesâ mentality again prevailed with the appointment of Hank Paulson (to be followed by Tim Geithner, Jack Lew, and now Steve Mnuchinâall of whom have finance-centric backgrounds).
For all of the supposed financial sophistication of Americaâs 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 ânuclear option,â 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.
Letâs 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 Treasuryâs malign neglect of U.S. manufacturing. Itâs also operationally wrong (see here for 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., didnât truly believe in the ânuclear option,â they have been happy to tamp down the possibility of a trade war in order to keep the capital markets stable. Each trade âdealâ 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 Chinaâs policy makers have never been forced to deal with the economic consequences of their countryâs mercantilism, which has resulted in the steady erosion of Americaâs 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 âChina tradeâ portfolio from the Treasuryâs 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 Americaâs chief trade negotiator. As Trumpâs U.S. Trade Representative (USTR), he has provided policy flesh and bones to the presidentâs robustly unilateral approach in trade.
If anything, Lighthizerâs 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 Chinaâs 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 Beijingâs state capitalism and noted that the countryâs administrative complexity likely precluded it embracing WTO rules, even if wanted to do so (which he doubted):
âAs part of Chinaâs system, specific large companies receive government patronage in the form of credit, contracts, and subsidies. The Chinese government, in turn, sees these ânational championsâ as a means of competing with foreign rivals and encourages their dominant role in the domestic economy and in export marketsâŠ
â[S]cholars have questioned whetherâgiven its lack of institutional capacity and the complexity of its constitutional, administrative, and legal systemâChina is even capable of complying with its WTO obligations.â
No doubt in thrall to the prevailing free-trade ideology, Washingtonâs âpolicy passivityâ made it loath to use available tools such as the WTOâs â421â 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 âaggressive unilateralismâ 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 todayâs 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 doesnât 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:
âThe 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 highâthe United States was supplying $12 billion of Chinaâs 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).
âThe real growth would need to come in sectors where China doesnât 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.â
So U.S. farm prices would be pushed up, which would hurt U.S. domestic consumers, even as it cosmetically dresses up Americaâs trade position vis a vis China.
Setser adds:
âChina 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 isnât a legal requirement for entry into the Chinese market. There are likely to be settlements on some long-standing disputes as wellâthe 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.â
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 presidentâs trade policy, even as the economic commentariat has continued to blast him.
Trump himself needs to understand that a third to a half of âtradeâ 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 Chinaâs bilateral trade surplus with the United States will ultimately disrupt these entrenched supply chains. It almost certainly wonât bring semiconductor manufacturing back to Americaâs shores.
In the end, therefore, pushing Chinaâs 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 Americaâs 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, Lighthizerâs 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 âvictory,â which Mr. âArt of the Dealâ will no doubt claim for himself when the negotiations do officially end.
This article was produced by Economy for All, a project of the Independent Media Institute.