US-China Trade Spat Unlikely to Worsen Despite Deficit
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By John F. Copper

US-China Trade Spat Unlikely to Worsen Despite Deficit

Mar. 01, 2018  |     |  0 comments

Despite Xi Jinping’s April 2017 visit to Mar-a-Lago, Florida and Donald Trump’s November Asia trip that included an important stop in China, the US-China trade balance has not improved. During both meetings, critical commercial deals were struck. Yet, the US-China trade ledger now has even more red ink for America.

According to the US Department of Commerce year-end report on trade, the US trade deficit rose 12 percent in 2017 to USD 566 billion — constituting the biggest gap in imports and exports since 2008. A shortfall in US exports to China versus imports from China, amounting to USD 375.2 billion, accounted for nearly half of that. The trade deficit with China has risen by 8 percent since Trump became president.

In response, Trump administration officials went on the offensive. Some blamed and berated China. President Trump ordered tariffs on solar panels. He also charged China with violating intellectual property rights rules while slamming China for aggressively demanding that US companies surrender their technology to China in exchange for access to China’s huge and expanding market — a demand they can usually not refuse. Trump officials labeled this an unfair trade practice.

Some Trump supporters in the meantime complain that he failed to fulfill his campaign promises to label China a currency manipulator and to apply a 45 percent punitive tariff on Chinese imports.

In January 2018, President Trump addressed the renowned World Economic Forum annual meeting in Davos, Switzerland. There he promised to reform the international trading system so that it “rewards those who play by the rules.” Some took that to be a slap at China; others said Trump was starting a trade war. Critics in the liberal media said his actions on solar panels and refrigerators will start a “cycle of unilateral moves” against free trade that will become contagious.

At nearly the same time, US Secretary of the Treasury Steven Mnuchin spoke in positive terms of a US devaluation of the dollar (to help fix the trade deficit) and the dollar quickly fell. Critics began to talk of Trump provoking a currency war that would broaden into something worse.

Meanwhile there were repeated cries from the anti-Trump liberal Western media that Trump was a protectionist and would cause a trade war that might even lead to a war with weapons of mass destruction.

Where is the US-China trade relationship going? What is the truth in all of this?

The answers are: Much of what has been reported about President Trump recklessly starting a trade war and his actions against China are either untrue or grossly exaggerated, with extenuating circumstances and events.

First, US exports rose overall in 2017 (Trump’s first year in office) by 5.5 percent. In December US external sales jumped by the fastest pace ever for one month. However, imports rose by 6.7 percent, the highest increase since 2011 and to a record level.

So much for Trump being a protectionist who would constrict foreign trade.

Second, President Trump immediately talked down (even contradicted his Treasury Secretary) the so-called plan to devalue the dollar. After a quick reaction in the stock market and some disquiet abroad, calm quickly returned. Little has been heard about this since.

Third, the trade deficit with China was caused in large measure by good economic news in the United States. Trump’s deft stewardship of the US economy spearheaded by the tax reform package stimulated growth and with it a big spike in consumer spending. Americans were buying more products made overseas (including China). In the meantime, China’s economy perked up and with that its exports increased.

This ironically shows that sometimes, good economic news begets bad economic news, but that is sometimes how things are.

Trump promised to reform the international trading system so that it “rewards those who play by the rules.” Some took that to be a slap at China; others said Trump was starting a trade war.

Fourth, the North Korean nuclear threat, and the belief that China’s cooperation was essential in helping Washington deal with this problem. Indeed, China had considerable leverage, and China and the US were generally on the same page (on nuclear proliferation and more). So good news was expected on this issue.

But the North Korean regime was always a tough one for China to deal with. Also, Chinese leaders did not want to see a collapse of the government and Korea’s reunification. Secretary of State Rex Tillerson said this was also US policy, but Chinese officials were hesitant to assume that this was true. Anyway, the process of using sanctions on North Korea was thus likely to be an extended one.

In short, the problem diverted American policy-makers’ attention away from the trade deficit. Likewise, for Chinese leaders.

Fifth, President Xi made promises when he visited Mar-a-Lago in April 2017 and again when President Trump visited China the following November to cut the trade deficit. During the first meeting, Xi pledged to open China’s financial services market to American companies and import American beef, plus he offered a hundred days of further talks to do more to fix the problem. During the second meeting, President Xi agreed to purchase a whopping USD 253.4 billion worth of American products.

Were President Xi’s pledges insincere?

No, in both cases it would take time to realize results from the deals. Getting into China’s financial services market would require American companies to make plans to proceed that would take months. The latter deal included memoranda of understanding that entailed further negotiations. Part of the deal included buying 300 planes from Boeing; most of that promise would take years to fulfill.

Thus, for the US to accrue benefits from these promises is something that will happen in the future, not the present. Yet it is not likely the promises will not be kept.

President Xi considers reducing China’s large trade surplus with the United States a top priority, and he is reported to have pulled a trusted ally, Wang Qishan (known as the “fireman” for his skill in handling emergencies) from mandatory retirement to deal with US-China relations. Just days ago, President Xi was reported to be sending his top economic policymaker, Liu He, to Washington to discuss trade.

Sixth, US businesses are optimistic about economic relations with China, as shown in a recent survey taken by the American Chamber of Commerce in China. Of the 411 members queried, 46 percent said they believed China was committed to further opening up, compared to 34 percent that voiced that opinion a year earlier. A significant 64 percent reported their revenues were up in 2017; 55 percent had said that in 2016. Most reported that profits were up. Three quarters said they planned to increase investments in China.

This would not be the case if American business leaders operating in China expected a crisis leading to a trade war.

Seventh, and very important to understanding the current situation, espousing anti-China sentiment and expressing it in public and to the media is a good election tactic and America is already in an election mode. Moreover, most consider the November 2018 election to be critical. The Democratic Party may capture a majority in the House of Representatives — in fact the average gain for the party out of power in an off-year election is 25 seats. If the Democrats gain that number of seats plus one it will be in the majority and will be able to impeach President Trump in 2019 as they have been anxious to do (although they would be unlikely to convict him in the Senate).

Thus, criticism of China over the trade deficit is part of the campaign narrative and making China a scapegoat for things going wrong in America is old hat. When George H. W. Bush ran for president he tried to cover up his good relationship with China and sold fighter aircraft to Taiwan. Bill Clinton castigated China for human rights abuses and for the trade deficit, and castigated Bush for his close ties with China. When George W. Bush ran he declared he would do “whatever it took” to help Taiwan. His opponents vilified China on several fronts.

This being the case, during this campaign period candidates are certain to employ hostile rhetoric toward China. It will come from both liberal and conservative candidates. It has already started. After the election it is to be expected that this will dissipate and the relationship will return to normal. Both US and Chinese leaders understand this.

Given all of this, the current trade spat between the United States and China should not be seen as terribly consequential. US-China relations are generally good, and much better than during the later years of the Obama administration. Both sides fully realize that to maintain a stable international financial regime, prevent nuclear proliferation, protect the global environment, and much more, cordial and workable US-China relations must be maintained.

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