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Sino-American Trade: What Comes Next

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Trans-Pacific View

Sino-American Trade: What Comes Next

A full-scale trade war now seems less likely than it did when Trump was elected, though it is still possible.

Sino-American Trade: What Comes Next
Credit: The White House

Now that U.S. President Donald Trump has settled into office and has opened lines of communication with China, anxious observers are still awaiting grand gestures in U.S.-China economic relations. Although he has been restrained in this arena so far, we can expect his administration to take more significant action for several reasons. Not only did Trump promise during the campaign to challenge Chinese trade practices by levying punitive tariffs and labeling Beijing a currency manipulator, but his election arguably signaled that a critical mass of both workers and businessmen favor recasting Sino-American ties.

Indeed, the longstanding, positive consensus on U.S.-China business relations has been supplanted by a far less forgiving outlook on the American side. China was granted permanent normal trade relations status (PNTR) and acceded to WTO membership in 2000-2001, and in the ensuing years its economy has grown at a remarkable annual pace of between 6.5 percent and 14 percent. Meanwhile, American manufacturing has shed five million jobs and the trade deficit has skyrocketed. In 2016, China accounted for more than 21 percent of U.S. imports and only 8 percent of its exports, reflecting a $347 billion merchandise trade deficit, just below 2015’s record-high $367 billion deficit. And while there is no consensus on the number of American jobs lost due to U.S.-China trade since 2000 — estimates range from zero to 3.4 million — several mainstream economists now agree that this trade has spurred significant job losses in some industries.

In recent years, critics from across the political spectrum have accused China of a host of protectionist sins: steel dumping, currency manipulation, cyber espionage, weak enforcement of intellectual property agreements, and overregulation of foreign enterprises. These charges are exacerbated by China’s unique status among trading states. Although it wields tremendous economic power as the world’s second-largest economy, it is a WTO-classified “developing nation” with hundreds of millions living in poverty and a per capita GDP far below those of the developed economies. WTO rules allow developing nations to levy higher tariffs; meanwhile, the U.S. has some of the world’s lowest tariffs and no value-added tax (VAT).

Trump’s Actions So Far

Trump began his presidency with a flourish by withdrawing the United States from the Trans-Pacific Partnership (TPP) and stating that he would negotiate superior bilateral trade agreements. Beyond this initial gesture, however, his early decisions have been relatively cautious. In March, he initiated studies of the trade deficit, promising that “we are going to get these bad trade deals straightened out.” More recently he has tasked the Commerce Department with investigating the national security implications of steel and aluminum imports.

Meanwhile, executive branch agencies continue to act on issues that predated Trump’s presidency. Early in March, for example, the Commerce Department announced that a Chinese telecommunications equipment company would pay a $1.19 billion fine for shipping equipment to Iran and North Korea — the largest civil penalty ever levied in an export control case. And as trade law expert Bill Perry has been documenting at the U.S.-China Trade War blog, American companies continue to file anti-dumping and countervailing duty cases against Chinese producers of many industrial products. “With a sympathetic Trump Administration and a very sympathetic Wilbur Ross as the new Secretary of Commerce,” notes Perry, “more cases are going to be filed against China and numerous other countries.”

President Trump and President Xi Jinping did not ink any major agreements when they met in Mar-a-Lago, far from the prying eyes of the beltway elite, but they did establish a working relationship. This was no small feat, as Trump had earlier tweeted that the meeting with Xi would be “a very difficult one.” The two sides agreed to establish a new comprehensive dialogue for bilateral negotiations, which by all appearances will supplant the Obama-era Strategic and Economic Dialogue (S&ED). They also agreed on a surprisingly short “100-day” framework for trade talks with the general objective of increasing U.S. exports and reducing the bilateral trade deficit. The Chinese side was open to this initiative because of the effects of the trade balance on China’s money supply.

Trump has since walked back his persistent claim against China’s monetary policies. As recently as February, he called the Chinese “grand champions at manipulation of currency,” but shortly after the summit he stated that his administration would not label China a currency manipulator. This turnabout may have grown in part from Trump’s desire to seek Beijing’s cooperation on North Korea, but it is also true that market forces in recent months have made it harder to defend the charge of currency manipulation.

Although China did devalue the RMB for many years in order to encourage exports and protect its workers, slowing growth has made the RMB less attractive on the currency markets, and China’s central bank has been propping it up in response to capital outflows. The U.S. Treasury Department’s latest biannual report on foreign exchange policies says as much, noting that China “engag[ed] in one-way, large-scale intervention to resist appreciation of the RMB for a decade” but has more recently “sought to prevent a rapid RMB depreciation that would have negative consequences for the United States, China, and the global economy.”

Trump has not yet taken a stand on the U.S.-China Bilateral Investment Treaty (BIT), which has been under negotiation since 2008. Proponents worry that the BIT will be yet another casualty to the anti-globalization trend, but Trump may very well support its completion and ratification in the interest of job growth. If ratified, the treaty could significantly enhance Chinese investment in the US while also removing some of the barriers now facing American investors and businesses in China. Chinese companies put a record $45 billion into the United States in 2016, while American businesses put $75 billion in foreign direct investment (FDI) into China in 2015. We can assume that these numbers would increase with BIT ratification, though if the Trump administration takes a tough posture toward China in other areas, the remaining BIT negotiations will surely be far more difficult. At present, the administration is prioritizing the trade deficit, but the BIT could become a part of Trump’s long-term dealings with China, especially if they can come to terms on market access for American companies.

Policy Options

The Trump administration is most likely to act in those industries most adversely affected by globalization and China’s trade practices, such as steel, textiles, and clothing. The American textile industry has lost 366,000 jobs since 2000, while primary metals have lost 265,000 jobs in the last two decades — 62 percent and 42 percent of their respective workforces. U.S. aluminum production has dropped 77 percent since 2000, while in the same period China’s share of the world aluminum market has risen from around 11 percent to just over 50 percent.

The administration has many reasons to address this imbalance, including national security: only one North American aluminum smelter can now produce the kind of high-purity aluminum needed for major defense platforms like the F-35 stealth fighter. China’s overproduction and exporting of state-subsidized steel has already fueled a minor trade war in which the United States, European Union, Japan, South Korea, and China have levied tit-for-tat tariffs for the past year or so. It is worth noting that some of Trump’s trade advisers and lawyers have experience in U.S.-China steel cases, which is one more reason to expect continued U.S. action in this sector.

The administration may also seek adjustments in the automobile trade, where the deck is clearly stacked in Chinese manufacturers’ favor. China levies a 25 percent tariff on cars and requires foreign automakers to grant at least 50 percent ownership of their China ventures to Chinese entities. By contrast, America’s auto tariff is only 2.5 percent, and foreign car companies face no such ownership requirements. Because of these and other factors, one-quarter of cars sold in America are imported compared with only 5 percent of those sold in China. The U.S. government does protect the domestic truck industry through a 25 percent tariff, but even without this heavy tax Chinese producers like Great Wall, Kawei, and Higer would have a hard time competing with long-established American and Japanese brands. The Ford F-Series truck has been the top-selling vehicle in America for 35 years, and American truck consumers demonstrate a remarkably high level of brand loyalty.

It is now clear that Trump’s campaign promise of a 45 percent tariff on Chinese goods was essentially a headline-generating statement of principle. Nevertheless, some protectionist measures are possible. Although Congress passes most tariffs, the president can also do so if he invokes the vague statutory powers granted in a time of war or a national emergency. He also has the power to levy short-term tariffs across all imports, or he can target a specific industry via the terms of Section 232 of the Trade Expansion Act of 1962 if such imports may threaten national security. Judging from the administration’s actions so far, Trump may very well implement Section 232 to reduce imports of aluminum and steel from China and elsewhere. Trump can also borrow ideas from his predecessor, as the former administration of U.S. President Barack Obama took many actions against China in the WTO and elsewhere.

It remains to be seen whether tougher American trade measures will amount to an aggregate domestic economic gain or whether they will help only a small number of workers in specific industries. When Obama backed 25-35 percent safeguard tariffs on Chinese tires in 2009, the results were mixed. In the short term, Chinese imports decreased and American tire companies expanded their production. But tire imports from other nations also increased, and China quickly retaliated against U.S. auto parts and chicken.

Free trade proponents see such protectionist ideas as reckless and, ultimately, most painful for low-income consumers. They further point out that automation has hurt more American workers than have trade policies, as evidenced by the five-fold increase in labor productivity that has accompanied the steel industry’s downsizing since the early 1980s. Moreover, some goods are particularly inappropriate for tariffs. Clothing imports are so popular among American consumers that tariffs are less politically viable than other kinds of trade restrictions. And if China-made clothing is restricted, then producers from Vietnam and Bangladesh will surely step into the breach.

The administration will likely get better results if they stress reciprocity in response to discriminatory economic policies, such as China’s market access restrictions on foreign companies. If the Trump administration seeks to even the playing field in certain industries, then they must accept that Beijing will retaliate against punitive actions. Chinese state media have been working overtime to emphasize the joint benefits of Sino-American trade, and they have promised to fight any harsh American measures. The Beijing-based Global Times warned that China will respond in kind to such actions, including canceling orders for Boeing airplanes, iPhones, and agricultural products, and even cutting the number of Chinese students in the United States.

This last point is no minor issue. The more than 300,000 Chinese students now enrolled in American universities contribute 10 billion dollars to the United States economy annually, and they are a significant boon to cash-strapped universities seeking full-tuition-paying foreign students. Beijing has proved willing to wield its economic power against other trading partners, most recently South Korea. It is not too difficult to imagine them doing much the same to the United States.

A full-scale trade war now seems less likely than it did when Trump was elected, though it is still possible. Such a conflict would have far-reaching ramifications, not least because Sino-American economic ties are so extensive and have helped solidify trans-Pacific peace and stability for the last quarter century. The inevitable rise in consumer goods prices could contribute to a global economic downturn. Even if one side could weather a trade war better than the other, both would be hurt. Chinese Foreign Minister Wang Yi was not far off the mark when he suggested, “Any sober-minded politician clearly recognize[s] that there cannot be conflict between China and the United States because both will lose.”

Joe Renouard teaches at the Johns Hopkins University School of Advanced International Studies in Nanjing, China. He is the author of Human Rights in American Foreign Policy: From the 1960s to the Soviet Collapse.