Reaching a Trade Deal With China
Applying Smart Leverage is Key, Says CSIS Report
What’s more important: redressing the US trade deficit with China or addressing economic issues between the world’s two largest economies going forward? Framed that way, the answer is fairly obvious, and we have previously reported that measuring the success of trade on the basis of trade deficits alone is faulty.
A recent report from CSIS suggests two factions within the Trump administration are pulling in opposite directions, possibly explaining the inconsistency of the White House’s approach to China trade. US Trade Representative Robert Lighthizer and Peter Navarro, the White House Director of Trade and Industrial Policy, “are focused on the backward looking and structural pieces”—in other words, the trade deficit—while Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow “are more concerned with the future looking and tactical bits,” which take them into areas like gaining fair access to China for twenty-first century US industries. The tension between the two groups has lead to mixed signals emanating from the administration and a seesawing policy of imposing, then, withdrawing, then reimposing sanctions on imports from China. (It’s also worth noting that Trump could use the help of Chinese President Xi Jinping in making his summit with the North Korean leader happen, a factor that also enters into the trade policy equation.)
The report suggests a middle path for the administration, focusing on requiring China “to offer up fresh access, with ironclad, near-term implementation timelines, to sectors that were never on the table as part of its WTO accession… while the United States could offer to take a breath on pending investment and visa restrictions that would make China much more reluctant to agree that its trade deficit with the United States is a problem.”
The US could also offer to acknowledge China’s desire “to move up the global value and supply chains” while China could agree to a “robust verification mechanism to curtail” elements of industrial policy such as the subsidizing of strategic industries.
To make this happen, the United States will need to understand where it has leverage over China. Harping on the trade deficit and insisting on more sales of soybeans and natural gas may sound to the Chinese like “the last gasp of an aging prize fighter who is trying to hold onto the championship title for at least a few more bouts.”
The key to applying leverage, said the report, involves “understanding of what actually is happening in China.” For example, a major concern for the government and central bank has been the massive capital outflows seen in recent years.
“China cannot move ahead with confidence on these very pressing domestic priorities,” the report concluded, “while such immense uncertainty remains with regard to its export picture resulting from the tensions with Washington. Understanding that point gives far more enduring leverage—one might call it ‘smart leverage’—to US negotiators than threats that could backfire if China chose to truly test US resolve.”
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