[SCMP Column] Trade skirmishes

May 07, 2018

Were last week’s US-China trade talks in Beijing a first step towards some kind of negotiated settlement, or were they a first formalization of hostilities?

That question was posed over the weekend by Eswar Prasad at Cornell and the Brookings Institution, and like Prasad, I have a nervous feeling we were watching a first military skirmish rather than any serious engagement in negotiation.

The first source of suspicion was the very size of the Trump team that flew into Beijing. By throwing into the fray a seven-man negotiating team that included Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross, US Trade Representative Robert Lighthizer, maverick advisor Peter Navarro who heads the White House’s National Trade Council, and the head of the National Economic Council Larry Kudlow, Trump without doubt brought out every big gun he has in his armoury.

The signal was clear that Trump is giving the China trade issue the highest priority. But at the same time the size and composition of the “team” powerfully illustrated the divisions across the US administration on how to manage trade relations in general, and with China in particular. Few could be as far apart on economic policy as Steve Mnuchin, a former Goldman Sachs boss, and Peter Navarro, author of “Death by China”.

As the meetings ended, Chinese officials politely described the talks as “candid and efficient”. The Xinhua news agency noted that “rather large differences” remain.

But as the US’s framework negotiating draft was released, there could be no clearer example of the US as a nation stuffed with lawyers intent on drafting, and trying to enforce, contract terms that were manifestly unacceptable. This was not a place for a meeting of minds. Glimpse a few words from the draft:

“In the event that the US considers that China fails to comply with any of China’s commitments… including deficit targets, China acknowledges the likelihood that the US will impose additional tariffs or other import restrictions on Chinese products… to such extent as the US deems appropriate. China also understands that it will not oppose, challenge, or take any form of action against the US’s imposition of addition tariffs or restrictions.”

As a negotiator, what would your view be if the team on the other side of the table told you what deal you had to agree to, and then bound you not to protest or retaliate in any way if the US punished you for failure or refusal to agree?
Even if the US negotiating team had a good case, there could surely be no way any self-respecting Chinese trade negotiator would comply – at least, not if he wanted to keep his job.

The conundrum for an outside observer like me is that there are clear and important demands that could be made of China – like speeding up its painfully slow liberalisation process, lowering domestic obstacles to competition from international companies, and reduce the favours being done to state owned enterprises at the expense not just of foreign competitors, but of China’s own private sector.

There are elements of the US negotiating position that press in this direction. They are strongly endorsed not just by US companies, but European ones too.

Instead of doing us all a favour by pressing for this kind of opening up, the majority of Trump’s negotiators seem to be obsessed by a pointless and economically muddled quest for managed trade arrangements to cut China’s bilateral trade balance with the US by US$200bn (by 2020).

There is no doubt that China needs to rein in its overall global trade surpluses. But as it has steadily built its domestic consumer economy, so there are signs of an overall narrowing. From a peak trade surplus in 2015 of US$594bn, the surplus has narrowed to US$510bn in 2016, and US$440bn last year. Imports rose by almost 20 per cent last year – twice the speed of export growth. While trade overall continues to grow, China in March reported a monthly visible trade deficit for only the ninth time in over 30 years.

Pressure to persuade China to open its market, and to reduce behind-the-border trade barriers is reasonable and welcome, but to press for special deals to be cut for US companies is embarrassing, economically illiterate, and a betrayal of the free market principles that the US has championed for almost seven decades.

As Stephen Roach, the Yale Professor who used to head Morgan Stanley operations in Asia, wrote in the SCMP just two weeks ago: “Yes, like the rest of us, the Chinese are tough competitors, and they don’t always play by the rules. For that, they need to be held accountable. But the case made by the US Trade Representative is an embarrassing symptom of a scapegoat mentality that has turned America into a nation of whiners.”

US negotiators are right to press Beijing to cut support to favoured State Owned Enterprises, but they should at the same time remember that the US government itself is not above large-scale subsidization. In the wake of the 2008 crash, General Motors is estimated to have received US$50bn in government loans and tax breaks to help it keep plants open across the country.

And as for US complaints about the “Made in China 2025” industrial policy, have they forgotten US president Dwight Eisenhower’s endorsement in 1961 of the powerful military-industrial complex as the linchpin of state-sponsored, taxpayer-funded innovation in the US, which led to breakthroughs in areas like GPS, semiconductors, nuclear power, imaging technology, pharmaceuticals innovations and more?

Liu He and the Chinese negotiating team will doubtless be scratching their heads on how to respond. Making any bilateral concessions to the US would be a clear betrayal of Xi Jinping’s recently-declared commitment to multilateralism. If we are to avoid a collapse into the bilateral anarchy in international trade, with the world’s smaller economies being the main victims, then it will be important for Beijing to ignore Washington’s playground bully tactics but to accelerate meaningful liberalization on a multilateral, level-playing-field basis.

Trade wars are not good, and they are not easy to win. I wonder whether the US trade negotiators appreciate that any more clearly as they fly back to Washington?
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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