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Making Sense of Trump’s Possible China Actions

Trump China policy wold restrict shipments of export cargo and import cargo in international trade.

Making Sense of Trump’s Possible China Actions

The Trump administration is reportedly deliberating imposing a set of economic measures to punish China. The timing is telling: It suggests that the Trump administration is looking for an effective expression of its mounting frustrations with China, including over the expanding bilateral trade imbalance, its resistance to reversing unfair trade practices, and its reluctance to do more to rein in North Korea’s nuclear and missile programs, despite President Trump’s persistent public and private prodding of President Xi to do so.

Through punitive economic measures, the administration will aim to signal to Beijing that patience is up and that China confronts a choice between working constructively with Washington on trade and North Korea, or facing the risk of heightened bilateral friction. Such a strategy appears to rest on two assumptions about US leverage over China.

The first assumption is that China is highly dependent on the US export market to sustain its economic expansion. Therefore, the thinking goes, the United States has untapped leverage over China as long as it proves willing to tolerate bilateral friction. In reality, China’s exports to the United States account for less than five percent of China’s GDP, and an even smaller amount (roughly three percent) when only value added is measured. While the US market remains significant for Chinese exporters, the role of the US market in contributing to China’s economic growth isn’t what it was 20 years ago. And, as China’s economic growth model shifts away from exports and investment toward a greater reliance on services and consumption, the relative importance of the US market for China’s economic growth will continue to shrink.

The second assumption is that the Chinese need stability in the US-China relationship, particularly ahead of their once-every-five-years Party Congress this fall. Therefore, according to this thinking, the United States should set a price for preserving stability, and threaten to punish China if it balks at paying up. While sound in theory, this assumption breaks down in practice. If Beijing felt an imperative to uphold US-China stability, it presumably would have delivered meaningful outcomes from the 100-day economic plan and made concessions necessary to present the appearance of a smooth US-China Comprehensive Dialogue (CED) this July in Washington. Instead, Beijing chose to stand by its longstanding bottom lines and accept visible friction with Washington as the consequence. The 100-day economic plan came in below expectations, and the CED ended with an uncharacteristic absence of bilateral agreement on outcomes or next steps. This suggests there are limits to the price Beijing is willing to pay for the appearance of stable US-China relations, and the limits appear to be below Washington’s expectations.

Trump’s economic toolkit

Nevertheless, the Trump administration appears determined to hit China. So, what might the Trump administration do?

Most widely discussed is a challenge to China’s intellectual property policies. The administration is reportedly about to launch an investigation to examine whether China’s intellectual property protections and technology transfer requirements on US firms operating in China constitute unfair trade practices that burden or restrict US commerce. If the administration reaches such a conclusion, the president has the legal option through an arcane authority from Section 301 of the Trade Act of 1974 to unilaterally seek remedies, ostensibly to press China to remove its discriminatory policies. Potential remedies could include sanctions on Chinese exporters or further tightening of export controls of sensitive dual-use products to China.

There also has been much discussion of some action on steel, where the administration has initiated an investigation into whether steel imports pose a national security threat to the United States. Quick action on steel is problematic for several reasons. First, the United States primarily imports steel from Canada, Mexico, South Korea, and Japan—only a tiny amount is imported from China. Since it is a widely traded commodity, any dumping by China in third markets depresses prices, but that is not a problem that can be addressed by US tariffs. Second, the fundamental problem of the industry is excess capacity, a lot of which is in China. This requires a worldwide solution, and in fact Trump got tough language about this inserted into the leaders’ communique from the G20 Hamburg Summit in July:

“We urgently call for the removal of market-distorting subsidies and other types of support by governments and related entities. We call on the members of the Global Forum on Steel Excess Capacity, facilitated by the OECD…to rapidly develop concrete policy solutions that reduce steel excess capacity. We look forward to a substantive report with concrete policy solutions by November 2017, as a basis for tangible and swift policy action.”

Given the G20 agreement to come up with a plan by November, it would be counterproductive for the United States to impose unilateral tariffs before seeing whether the multilateral route yields any real progress.

Trump could consider protectionist measures beyond steel, probably at the end of the 301 investigation. During the campaign, he called for a 45 percent import tariff on Chinese products. Something more modest, like 10 or 20 percent, would get China’s attention. As noted above, however, China’s economy is not that export-dependent anymore, so there are ways it could compensate for the loss of demand.

A protectionist policy would hurt the US economy as much as the Chinese. Given today’s complex value chains, a Chinese product has lots of value added from the United States, Japan, South Korea, and other partners. Some US firms would be hurt, US allies would suffer, and consumer prices would rise. One thing we are sure of is that China would retaliate, buying less American output such as aircraft, agricultural products, and tourist services. At a broader level, protectionism shifts jobs from one sector to another, but is not generally a net creator of employment. Previous US forays into protectionism—such as the Smoot-Hawley tariffs or Reagan’s voluntary restraint agreements with Japan—were followed by increases, not decreases, in the US trade deficit. Talk of getting tough with China on trade runs into the classic problem that small actions are mostly symbolic and big actions hurt the US and world economies.

The administration also could announce a new set of sanctions against Chinese entities that do business with proscribed North Korean entities. That would build on the Treasury Department’s June 29 announcement of sanctions against a Chinese bank, a Chinese shipping company, and two Chinese nationals that were accused of helping North Korea evade international sanctions. New designations would create a ladder of sanctions actions against incrementally more significant Chinese actors. The administration could highlight the action as the equivalent of killing two birds with one stone—responding to North Korean intransigence and getting tougher on China at the same time.

Tread cautiously

The Trump administration confronts familiar frustrations with Beijing’s obstinacy on a range of priorities. Previous administrations have been disappointed by Beijing’s limited cooperation on purportedly shared priorities.

When faced with similar circumstances, past administrations have largely opted against broad-brush punitive actions that would have undermined the broader economic relationship. A variety of factors contributed to those decisions, including a recognition that the Chinese market is important to the US export sector, an understanding of the limits of US leverage over China, a general wariness of protectionism, and a recognition that the economic relationship traditionally has served a stabilizing function for the broader bilateral relationship. While many members of the business community likely would applaud efforts to push back against unfair Chinese trade practices, not all sectors of the US export community will benefit, and some may in fact become exposed to retaliation from China.

Additionally, there is the real question of whether the unilateral US actions under consideration would cause Beijing to change its economic policies. It is more likely that Beijing would respond to multilateral pressure; the Trans-Pacific Partnership, for example, would have created a large, open market excluding China until it agreed to disciplines on inward investment, services trade, and intellectual property rights protection. Given the stakes involved and the need to ensure that any action generates more benefit than loss to the US economy, the Trump administration should tread carefully before taking unilateral actions that could have broad and direct impacts on US interests.

Ryan Hass is a fellow and David Dollar is senior foreign policy fellow at Brookings’ John L. Thornton China Center. This article originally appeared here.

US and China in talks on shipments of export cargo and import cargo in international trade.

What to Expect From US-China Comprehensive Economic Dialogue

This week, the United States is hosting the inaugural US-China Comprehensive Economic Dialogue, co-chaired by Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, and Chinese Vice Premier Wang Yang. The dialogue serves as the principal forum for Washington and Beijing to address trade and investment issues. This week’s session is likely to produce agreement on a one-year action plan for tackling trade and investment impediments, building on the 100-day plan inked at President Trump’s April meeting with Chinese President Xi Jinping.

However, to the consternation of some in the US business community, the new action plan likely will be general and non-specific, focusing more on principles and shared commitments than concrete steps or detailed deliverables. More broadly, we do not expect either side will take steps at this dialogue that would alter the trajectory of bilateral trade and investment, dynamics that have been markedly stable to date this year. Trump’s approach thus far demonstrates broad continuity with that of his predecessors—encouraging further Chinese opening while refraining from steps that might undercut the bilateral economic relationship.

There are four primary reasons for restrained expectations surrounding the upcoming talks.

The United States will not make concessions on China’s priorities. The United States will not recognize China as a market economy, and will not entertain requests to loosen export controls on high-tech products or make it easier for Chinese firms to invest in the United States unless/until China takes reciprocal steps to improve market access for US firms in China. The United States also is not prioritizing negotiation of a bilateral investment treaty with China amid the various competing priorities facing the US trade representative, such as renegotiating NAFTA and the US-Korea Free Trade Agreement.

China does not feel pressure to cave to US demands. The 100-day action plan produced only modest results—primarily opening the beef market in China to American products. Still, the Trump administration hailed the outcome, with President Trump praising the progress on Twitter, Secretary Ross hailing it as a “herculean accomplishment,” and Secretary Mnuchin stating that he “couldn’t be more pleased.” Privately, administration officials also have been signaling to Beijing that they understand that trade imbalances and market access challenges will take time to resolve. These private and public signals relieve pressure on Beijing to make near-term concessions and allows China to use processes—dialogues, roadmaps, and political commitments—to lend the appearance of constructive engagement in addressing longstanding irritants.

This is a political year in China, with the 19th Party Congress slated for autumn. The Party Congress is a once-every-five-year event at which the top leadership turns over. President Xi will certainly remain in place, but there is much uncertainty and political jockeying over all other senior positions. In this environment, no senior Chinese official will want to invite any appearance of capitulation to US pressure, given the negative effect such a perception would engender for his/her standing within the Chinese leadership. “Stability” is the watchword for the year in terms of China’s macroeconomic policies and performance and its structural policies. There will almost certainly not be any important policy announcements at the dialogue, such as broad opening of the many still-closed sectors in the economy. Whether the new political line-up moves faster on reform likely will not be known until after the National People’s Congress in March 2018. 2017 is not a promising year to negotiate reforms with China.

A potential US decision on steel tariffs will cast a cloud of uncertainty over the talks. It is unlikely that the steel decision will be announced before the dialogue begins, but the expectation of US action on steel will affect the meeting. In reality, the United States imports very little steel from China (less than five percent of steel usage); the major exporters to the United States are Canada, Mexico, South Korea, and others. Still, China’s large excess capacity and exports to other parts of the world market are problematic and worthy of discussion between the two sides. However, these are not problems that can be solved by American tariffs, which will hurt mostly US allies and US firms and workers in industries that use steel, while having only a small, indirect effect on China. Any significant tariffs on steel could signal a more protectionist US stance, which would affect China directly, and likely lead to a hardening of China’s positions vis-à-vis the United States.

While the upcoming economic dialogue may not produce detailed deliverables, trade and investment between China and the United States continues to grow. Through May, according to the most recent US data, American merchandise exports to China increased 17 percent from the year before, while imports grew eight percent. China’s economy is growing much faster than the US economy, and the Chinese market remains important for some US industries. If those trends continue, the big trade imbalance between the two countries will decline in the long run. The healthy growth of US exports to a fast-growing Chinese market is one reason to tread lightly with protectionist measures that would invite retaliation.

In the short run, however, the imbalance continues to widen. The bilateral imbalance has increased five percent so far this year (our exports may be growing rapidly, but from a low base). In this complex environment, the Trump administration probably will continue the policy of the last two presidents—cajoling China to open up more, but avoiding harsh measures that would impede the economic relationship.

David Dollar is a foreign policy senior fellow and Ryan Hass is a foreign policy fellow at The Brookings Institution. This article originally appeared here.