Can Trump Deliver on Economic Issues With China?
A Few Flashy Export Deals Are the More Likely Result From Meeting With Xi
This week President Donald Trump will visit Beijing for his second summit meeting with Chinese President Xi Jinping. Based on Trump’s campaign rhetoric, one would assume economic issues will be high on his agenda—as they certainly should be.
Under President Xi’s leadership, China is doubling down on a strategy to build up Chinese industries at US expense. Instead of trending toward greater opening, Beijing is adding new market access barriers for US goods and services in China while simultaneously encouraging Chinese firms to expand their presence in US markets. In some sectors where US and Chinese goods compete globally, Beijing is providing market-distorting subsidies to help Chinese firms undercut their American competitors. These are not new strategies, but Chinese leaders are ramping them up at a time when their nation’s growing economic heft and technical capabilities magnify the degree to which an imbalanced relationship with China impacts US competitiveness.
To be sure, US-China trade and investment issues are one facet of a much broader US economic challenge. Some politicians—including President Trump—tend to use China as a stand-in for globalization writ large. It is important to separate problems associated with specific Chinese policies from problems associated with lagging US policy adjustments to globalization. There are plenty of specific China issues to point to, however, and American businesses and workers are increasingly concerned that the United States is losing more than it is gaining from its economic relationship with China.
Donald Trump channeled those economic frustrations to get to the White House. He called China’s trade strategy vis-à-vis the United States “the greatest theft in the history of the world” and promised to “win against China” and go head-to-head with Chinese leaders to get a better deal for American workers and businesses. At nearly one year into his presidential term, however, Trump has thus far failed to make any real headway on this front.
Thus far, the administration’s approach to US-China commercial and trade friction has been to launch study after study without delivering substantial concrete action. On the eve of his first summit meeting with Xi Jinping, the Trump administration accepted a Chinese proposal to launch a 100-day process that effectively removed economic issues from the summit agenda. After that process concluded, Trump launched yet another assessment process focused on intellectual property and forced technology transfer. This study has not been followed up by any concrete enforcement action.
This upcoming summit is an opportunity for the American public to determine how serious the Trump administration really is about tackling these issues. President Trump needs to make clear that rebalancing the US-China commercial relationship is a top priority, his administration has a comprehensive strategy for protecting US economic interests, and China will face consequences if Beijing does not quickly address key US complaints.
President Xi will bring his own agenda to this meeting, however, and thus far President Trump has proven to be less than adept at applying pressure to his Chinese counterpart. Compared to Trump, Xi Jinping is a much more experienced politician and diplomat. He is also coming off a highly successful Party Congress—during which President Xi was appointed to a second term and successfully stacked the senior Chinese Communist Party leadership with key allies. Trump, on the other hand, is battling within his own party and facing Russia investigations that get deeper by the day.
American workers and businesses assessing Trump’s trip to Beijing and its likely impact on US competitiveness should track administration strategy and performance across the following three issues to determine how President Trump is performing vis-à-vis his Chinese counterpart.
Will the US ratchet up the economic pressure or continue to diffuse it via issue linkage?
Beijing is well aware that American workers and many American companies are growing increasingly frustrated with the terms of US-China commercial exchange. Chinese leaders know many US interest groups are pushing for change via tariffs, increased trade enforcement, and new limitations on inbound Chinese direct investment. President Trump’s responsibility is to accurately convey those concerns to Beijing and use every lever in his arsenal to push for change. President Xi’s objective will be to diffuse this pressure at minimum cost to China.
Beijing knows the United States has two top priorities for this summit: trade and North Korea. These issues share a similar dynamic in that the status quo is worse for the United States than it is for China. On both issues, the United States will be pushing for change and China will be aiming to take just enough action to prevent US enforcement measures that impose significant costs on China, such as trade enforcement or secondary sanctions.
To maximize US interests, President Trump needs to deliver significant action from China—or significant countermeasures from the United States—on both the issues of trade and North Korea. China, in contrast, will want to tie the two together and trade action on one issue for reduced pressure—and lack of significant countermeasures—on the other. Unfortunately, this kind of quid-pro-quo issue linkage is exactly what the Trump administration has allowed Beijing to do thus far. At the Mar a Lago summit, Trump tweeted, “I explained to the President of China that a trade deal with the US will be far better for them if they solve the North Korean problem.” The message to Beijing is clear: North Korea is the primary US objective, trade is secondary, and there is no need to deliver on both fronts.
Xi Jinping will aim to keep these issues firmly intertwined throughout the upcoming summit. Kim Jong Un’s threating acts of provocation—combined with concrete evidence that China has been supporting North Korean trade in ways that violate U.N. sanctions that its own diplomats signed onto—provide substantial leverage to extract more robust cooperation from China on issues of regional security. The US Treasury Department has enough information about Chinese wrongdoing to block major Chinese banks and companies from international financial markets, an outcome that Beijing is keen to avoid. China is highly likely to take at least some additional steps on North Korea, and President Xi will argue that, as a result, Trump should back off on trade.
If President Trump continues to accept such a deal it will be bad news for American workers and businesses. It will also indicate that his campaign promises to get “a better deal” on trade were just empty rhetoric.
Will narrow commercial deals be the focus, or will the summit produce concrete Chinese commitments for policy change?
From a US perspective, there are broad systemic problems in US-China commercial relations, and those problems require broad solutions. Beijing is enacting nonmarket regulatory policies that privilege Chinese industries and firms at US expense. Those policies include measures such as foreign investment restrictions in a wide array of sectors ranging from manufacturing to education and entertainment; unequal protection under Chinese law for Chinese versus foreign firms; special regulatory exemptions for Chinese state-owned enterprises; forced technology transfer; failure to adhere to timelines required by the World Trade Organization (WTO) to publish new laws, regulations, and measures in advance of their implementation; and intellectual property rights violations. In some industries, Beijing also continues to provide WTO-prohibited subsidies that lower production costs and give Chinese firms a price advantage in global markets. On these issues, Chinese policies undermine multiple US businesses and workers and, in some cases, entire US industries.
President Trump’s responsibility is to push China to shift those policies and, if China refuses to budge, enact measures that impose costs on China and reduce the damage to the United States. Shortly before President Trump departed for Asia, the US Department of Commerce released a memo stating that, according to its assessment, China remains a nonmarket economy and the United States will therefore continue to use a nonmarket formula to calculate tariffs on Chinese imports that violate US trade laws.
This assessment sends an important signal to Beijing. China’s WTO accession agreement states that WTO member nations that import goods from China will treat China as a nonmarket economy until December 2016, at which point many observers have long assumed the United States and other WTO members would begin treating China as a market economy for tariff purposes. The decision to treat China as a nonmarket economy is significant because such an economic status generally results in higher tariffs. The new Department of Commerce statement—paired with preliminary US tariffs on Chinese aluminum foil that use the nonmarket formula—make clear that the United States will formulate trade policy toward China based on actual Chinese policies rather than diplomatic assumptions. However, this move simply protects the status quo—the United States has treated China as a nonmarket economy since 2001—and it only applies in the relatively few cases where tariffs are imposed. What is really needed is a comprehensive push for policy change in China. That should be one of President Trump’s top priorities for this summit.
China’s goal, in contrast, will be to deliver a few flashy commercial deals that give the impression US-China commercial relations are delivering great benefits for the United States. China will attempt to give President Trump some announcements to brag about at home while keeping in place nationalist economic policies that rig the Chinese market and in some cases entire global markets against US firms and workers. Many of the deals announced at this summit will have been in the making for months, if not years. Beijing has been working behind the scenes to nudge Chinese firms involved in ongoing US-China commercial negotiations to reach agreements in time to announce new deals at this summit.
Both sides are likely to shine a particularly bright light on US export deals with China, which Trump can tout as progress toward rebalancing the trade deficit. Commercial agreements to sell US aircraft and liquefied natural gas to China are highly likely.
There is nothing wrong with featuring commercial deals at presidential summits; those agreements provide new market access for the companies involved, and that is a good thing. However, one-off deals do not address broad American trade and investment concerns and are no substitute for policy action. Moreover, these deals need to be evaluated not simply on their immediate effect on the dollar amount of the trade deficit, but also on the overall, long-term competitiveness of the US economy.
Deals that further push the US into the position of becoming a commodity exporter—of products like natural gas or timber—while China becomes the value-add manufacturing powerhouse may actually weaken US strategic positioning in the global economy.
To really deliver for the American economy and in particular for American workers, President Trump needs to push President Xi to change policies that disadvantage entire US industries and undermine broader US national interests, such as:
Import substitution: Under President Xi Jinping’s leadership, Beijing is identifying key sectors where US firms and technologies are particularly competitive and leveraging multiple policy tools to develop Chinese alternatives, drive the United States out of the market, and bring the Chinese alternatives in. The semiconductor industry is one example. Beijing has a policy to cut China’s dependence on US semiconductors in half and increase the domestic market share of Chinese-manufactured semiconductors to 70 percent by 2025. By 2030, Beijing wants its firms to dominate global markets. To make this happen, China is channeling more than $150 billion in state-directed financing to buy up US semiconductor companies and transfer their technical know-how to China.
Overcapacity and dumping: China is struggling to wean its heavy industrial sectors from subsidies that reduce manufacturing costs and enable Chinese firms to over-produce and then dump excess product on global markets, driving down global market prices. Aluminum is a particular concern. The US Trade Representative estimates that China’s WTO-illegal subsidies in the aluminum sector directly contributed to a 37 percent drop in US production from 2007 to 2015 and forced the shutdown of half of the US aluminum smelters that were operational in 2011.
Market access barriers: Across a range of sectors, Beijing is making it increasingly difficult for US firms to enter the Chinese market while simultaneously investing billions in state revenue to send Chinese firms to the United States. For example, tech platforms Google, YouTube, Facebook, and Twitter are all banned in China, but Beijing is encouraging Chinese platforms such as Alibaba, Tencent, and Baidu to expand their reach in the United States and other international markets.
This is not to say that the Unites States is without fault in the array of challenges this nation is facing on global trade and economic competitiveness. The United States has significantly underinvested in key innovation drivers that range from infrastructure to workforce training to child care and other public services that contribute to strong domestic job creation and a flexible, globally competitive work force. US regulators have also failed to prevent excessive market concentration, which contributes to income inequality. But these oversights on the part of the United States do not let China off the hook on its retreat to mercantilist policies.
If China is not willing to take concrete action on the systemic problems in US-China commercial relations, President Trump should not allow President Xi to frame US-China economic relations as a positive, win-win area of the relationship. It is better to have a difficult meeting than to paper over serious US concerns. Beijing will want to frame commercial relations in terms of shiny but narrow business deals; Trump has a responsibility to push for a better comprehensive deal for the American people.
Will the United States go it alone or work collaboratively with like-minded nations?
One of the biggest strategic advantages that the United States has when dealing with Chinese economic challenges is the fact that these are not just US problems. Many other nations are equally concerned about China’s nonmarket subsidies, techno-nationalism, predatory overseas acquisitions, and protectionist regulatory policies. There is no need for the United States to stand alone on these issues; instead, Washington should be working multilaterally to address these issues in concert with other nations.
When the United States pushes China on its economic policies unilaterally, that feeds a narrative inside China that the real US objective is to trick Beijing into enacting measures that slow its own development and make it harder for China to compete with the United States. When multiple nations push jointly, it is easier to convince Beijing that the objective is a level playing field for all and that if China does not abide by international trade rules, it could face substantial enforcement action in multiple overseas markets. In 2015, for example, China suspended and then reworked draft banking cyber security regulations in response to coordinated pressure from the United States, the United Kingdom, and key EU leaders.
Beijing always prefers to deal with other nations bilaterally, because that maximizes China’s leverage vis-à-vis its counterparts. The United States should aim to deal with economic issues multilaterally, because many other nations share our concerns, and presenting a united front maximizes our own leverage.
The Trans Pacific Partnership (TPP) partially aimed to do just this: bring together like-minded nations to set trade and investment standards based on a common interest in fair, rules-based governance and liberalization. Putting aside concerns about whether the TPP was sufficient on items like labor and the environment, continued US participation within the TPP would have set standards for China to aspire to, and also pressured China to improve its own practices to avoid being left behind by other Asian nations. Since the Trump administration has withdrawn the United States from the TPP, it will need to find another framework for bringing in other nations to press and engage China multilaterally.
During his trip to Asia, President Trump will have plenty of openings to make strides toward this kind of multilateral engagement with China. He will visit key allies Japan and South Korea before he lands in Beijing, and he will travel immediately from Beijing to the Asia Pacific Economic Cooperation (APEC) leadership summit in Vietnam. President Trump should leverage these opportunities to find a new mechanism for the United States to engage the broader Asia Pacific on common commercial concerns with China.
Thus far, the Trump administration has signaled an intention to engage other nations bilaterally and remain disengaged from multilateral forums. If that trend continues throughout President Trump’s Asia trip, the administration will be playing right into Beijing’s hands.
President Donald Trump and Chinese President Xi Jinping have one thing in common: Both leaders are very good at crafting a narrative and using theatrics to sell that narrative to the public. They have different styles, but the goal is the same. This upcoming summit will be an unprecedented demonstration of diplomatic pomp and circumstance. President Xi will put on a very good show. He and his team are very adept at handling foreigners, and they have had ample opportunity to study President Trump, his weaknesses, and what will render him starry-eyed and amenable. Americans who depend on their president to represent their national interests will need to look beyond that spectacle to assess what the United States is really gaining from this summit, what it is giving away, and how the nation will need to hold its president to account in future.
Helping the American Economy Grow
Download the FREE Global Trade Magazine APP!