By Daniel Garst
“It doesn’t seem like anything was actually agreed to at the dinner and White House officials are twisting themselves into pretzels to reconcile Trump’s tweets (which seem, if not completely fabricated, then grossly exaggerated) with reality,” or so declared Carl Quintanilla in JP Morgan Notes about the 90-day truce in the U.S.-China trade war Trump and Xi arranged over their dinner at the Buenos Aires G-20 Summit.
Financial markets have issued a similar acid verdict on the President’s latest trade diplomacy, with the Dow plunging nearly 800 points, or 3.2%, two days after the deal was concluded. The Dow and the Nasdaq have since fluctuated wildly, and one major factor in this instability is market uncertainty regarding future developments in trade with China.
Markets are right to be rattled. The episode in Buenos Aires provides yet more proof, as if it were needed, that when it comes to trade, Trump and his economic team are the gang that can’t shoot straight. This crew could not be in sync on even the basic matter of when the 90-day timeline for China to make “structural changes” on intellectual property protections, forced technology transfer and other issues was to start.
National Economic Council Director Lawrence Kudlow initially put that at Jan. 1, only to have the White House correct him shortly afterward to say the starting date was actually Dec. 1. The President engaged in his usual flair for exaggeration in describing his accomplishments in summit negotiations, claiming on Twitter that China had agreed to remove tariffs on American cars coming into China and immediately start buying large quantities of U.S. farm products.
Kudlow quickly dialed back expectations regarding autos, telling reporters following the Trump-Xi meeting, “We don’t have a specific agreement on that,” apparently contradicting Trump’s tweet on this matter. He then airily declared, “But I will just tell you, as an involved participant, we expect those tariffs to go to zero,” even though auto tariffs were not mentioned in the U.S.-China statement issued after the Trump-Xi dinner meeting.
As the old adage goes, “The fish rots from the head,” and this certainly applies to Trump administration trade diplomacy. Directing it is a President who wears his lack of basic literacy about international economics on his sleeve.
In his latest Wall Street Journal interview on Nov. 26, Trump mixed up tariffs, which are a sales tax imposed on imported goods, with interest rates, which are the extra money individuals owe when taking out a loan. Trump repeated this claim, even after Wall Street Journal reporter Bob Davis noted the error.
In the same interview, while discussing his steel tariffs, the President invoked phantom steel plants as he played up the steel and aluminum duties. And Trump keeps insisting that when the U.S. runs trade deficits with China, it is giving money to the Chinese, as opposed to purchasing and getting products, which in most cases would not make sense to produce domestically.
Moreover, much of the money China obtains from running a trade surplus with the U.S. is recycled back to us in the form of lending to our government when China purchases T-bills and the like, thereby helping to finance American fiscal profligacy.
For the latest round of trade negotiations with China, Trump has sidelined Treasury Secretary Steven Mnuchin, who no longer has much credibility in Beijing following his inability to keep the deal Vice Premier Liu He thought they struck back in May. Trade hardliner Robert Lighthizer will be leading the U.S. team instead. Surprisingly, some on the Chinese side seem happy with this choice, despite Lighthizer’s credentials as an incredibly competent trade hawk and negotiator. In taking on this chore, however, he has embarked on mission impossible.
To start with, China and the U.S. have different understandings of the Trump-Xi dinner deal. While the Trump administration foresees swift progress in lowering the China-U.S. bilateral trade deficit, Chinese state media vaguely talks about a “gradual” reduction. The same applies to White House claims that China will purchase “very substantial” quantities of American farm, energy and industrial exports.
As noted earlier, the President casually asserted China was eliminating tariffs on imported American cars, even though nothing of the sort was said in the joint communique issued in Buenos Aires (under World Trade Organization [WTO] rules, if China did that, it would have to do the same for motor vehicles exported from other countries).
In intellectual property (IP), the Trump administration believes China will immediately negotiate forced technology transfer and strengthen IP protection. The Chinese have said the two countries will merely work together to reach a consensus on such matters, however. None of this bodes well for the success of the upcoming negotiations.
One overriding Trump administration goal is substantially reducing the large U.S.-China trade gap, which is integral to the overarching objective of lowering the overall American current account deficit. Even if China agrees to buy much greater quantities of American exports—as just noted, this is by no means likely—cutting the bilateral U.S.-China trade deficit would have little impact in putting the overall American current account balance into the black.
Contrary to Trump’s extreme transactionalist view of global commerce, “good/bad” trade deals have a minor bearing on trade balances. Most economists who study global trade argue that the large American current account deficit, which has grown under Trump, stems from the low rate of savings in the U.S. compared to investment and its impact on exchange rates between the dollar and other currencies.
By ballooning the federal government budget deficit and further lowering the already meager U.S. savings rate, the tax cuts championed by Trump and the Republicans will cause the American current account balance to go even deeper into the red. Under these circumstances, any improvement in the bilateral U.S.-China trade balance would be offset by lower U.S. trade surpluses or higher trade deficits with other countries, leaving the overall balance unchanged.
In recent tweets, Trump proudly called himself “Tariff Man,” a comment that helped tumble financial markets, while boasting about the “billions” of dollars of tax revenue brought in by his recent duties on imports from China and other countries. This bragging ignores the inconvenient reality that the U.S. trade deficit with China has risen substantially since the President initiated his trade war.
According to August 2018 U.S. Census Bureau data, the year-to-year U.S. goods deficit with China stood at $261 billion, 8.3% higher than the $240 billion through August 2017. Trump claims that a trade war with China would be easy to “win,” arguing that the latter’s large trade surplus with the U.S. means that it has more to lose from such a conflict.
To be sure, reducing Chinese exports to the U.S. will cause China some economic pain. But as Anatole Kaletsky, chief economist at Gravekill Dragonomics, points out, China can compensate for the reduction of exports to the U.S. by greatly ramping up its currently modest efforts to stimulate the domestic economy and boost consumer demand. At the same time, pain is being felt across the Pacific, as U.S. manufacturers see their global supply chains disrupted and farmers are cut off from the large Chinese market for their soybeans, tree nuts and the like.
Thus, the threat of further escalating the trade war, the Trump administration’s main stick in the trade war with China—here, as in other trade negotiations, the President is offering no carrots—is unlikely to induce Chinese concessions on technology transfer and IP. Trump is not the first American President to raise these issues with China, which has misbehaved by forcing foreign firms investing in the country to turn over proprietary technology and unfairly subsidizing domestic high-tech firms.
Unfortunately, the standoff between the countries here is deep-rooted. China understandably wants to move away from being the “world’s workshop” by enhancing its technological prowess. It is unlikely to make even minor modifications to the ambitious “Made in China 2025” initiative promoting Chinese champions in artificial intelligence, 5G wireless, quantum computing and the like. The U.S. and China have wrangled for years over their stark and complex differences on this matter, so to believe it can be settled in just 90 days is extreme wishful thinking.
In the improbable event that the Trump administration “wins” with respect to Chinese practices in technology transfer and IP, it might regret getting what is wishes for. After all, doing that would level the playing field for Western firms operating in China, enhancing their incentive to set up shop there.
As Simon Johnson of the MIT Sloan School of Management acutely notes, “Trump vows to ‘bring back’ manufacturing jobs to the U.S. How does making it easier for American companies to manufacture and innovate in China contribute to fulfilling that promise?”
If the current round of trade negotiations with China breaks down, as is likely, rather than resuming and ratcheting up the tariff war, the U.S. should greatly intensify efforts to maintain its own high-tech prowess. Yet the Trump administration seems fixated on the futile attempt to bring tech manufacturing back to the U.S.—the President has asked on numerous occasions why iPhones are not assembled domestically.
Does Trump really think in his wildest dreams that it’s possible, especially in the current tight labor market, to get 350,000 Americans to work at the kind of Foxcom mega production facility in Zhengzhou that assembles 500,000 iPhones each day? A better focus would be on R&D and product innovation and development.
But as Kara Swisher, who covers technology for the New York Times, stressed in a Dec. 7 editorial, Trump administration immigration policies restricting the legal immigration of foreign scientific talent hinder doing that. Swisher further notes that the Five-Year White House plan around U.S. STEM (science, technology, engineering, math) education “is not nearly robust enough to make the Chinese even slightly nervous that we can keep up with their decidedly more aggressive efforts to train their workforce for the next era of computing.”
Second, as many analysts have suggested, the best way for the U.S. to exert leverage against China over its technology transfer and IP practices is through coalitions with other countries. Europe, Japan, and South Korea are also upset about Chinese policies pressuring foreign firms investing in the People’s Republic to hand over technology and limited IP safeguards. They would happily form alliances with the U.S. to exert joint pressure aimed at getting China to modify its bad habits in these areas. Rather than doing that, Trump is picking needless trade fights with close American allies such as Canada and Germany over steel and aluminum and cars.
The Trump administration is busy dismantling another potential avenue for pressuring China, the WTO. Under Trump, the U.S. has been blocking the appointment of judges to a key WTO appeals court for adjudicating trade disputes. The WTO trade dispute resolution mechanism could soon grind to a halt, perhaps as early as next year.
One of the most revealing anecdotes in the latest Bob Woodward book, Fear, which underscores Trump’s detachment from reality, concerns his stubborn refusal to believe, after being told so by Gary Cohn, that America wins far more often than it loses under in the WTO. From 1995 to 2017, the U.S. prevailed in 91% of the cases it brought against other countries, according to data from the conservative Cato Institute.
If Trump wants China to mend its ways on technology transfer and IP, a double-edged campaign of external diplomatic pressure on China via the WTO dispute resolution mechanism and alliances with aggrieved Chinese trading partners is far more likely to succeed than tariffs.
As a New York real estate mogul, Trump could through bluff and bluster bludgeon and intimidate the local media, rival developers and others standing his way. The discovery that sovereign states cannot be shouted and threatened into submission has come as a rude awakening. Little Tariff Man has reacted in a fit of pique, waging willy-nilly badly thought out and pointless trade wars, while undermining the rules-based international trading system that has greatly benefited the U.S. since World War II. If this is what “Making America Great Again” is all about, we can do with, well, a little less of this kind of “greatness.”
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Daniel Garst is a lecturer in the political science department at Fresno State. He lived in China for 12 years, from 2005 to 2016, and has published more than 100 newspaper and magazine articles about the country.
