Allies find relations modestly tweaked, despite the president’s rhetoric, while relations with China are entering a deep freeze
When Donald Trump entered the White House on a platform of defiant nationalism nearly two years ago, many feared he would dismantle the global trading system the U.S. and its allies had built over the past 70 years.
He hasn’t. Instead, he is presiding over its realignment into two distinct systems.
- One, between the U.S. and its traditional, democratic trading partners, looks a lot like the system that has prevailed since the 1980s: free trade with a smattering of quotas and tariffs like those Ronald Reagan once deployed.
- The second reflects an emerging rivalry between the U.S. and China carrying echoes of the Cold War. On trade, investment and technology, the U.S. is moving to undo some of the integration that followed China’s accession to the World Trade Organization in 2001.
There are two big questions hanging over this realignment. The first is deciding how far the U.S. is prepared to decouple from China. The U.S. has given China until March 1 to avoid higher tariffs by addressing complaints it discriminates against foreign companies and steals their technology. Mr. Trump is counting on a deal that avoids a trade war. But many in his administration and Congress don’t trust China to make the necessary concessions and would likely advocate a sharper break.
The second question is whether the U.S. can persuade allies to join a united front to contain China. Other countries don’t relish the choice. Their economic ties to China are far greater than they ever were to the Soviet Union during the Cold War.
Nor are the ideological choices as clear cut. China isn’t waging an ideological struggle against the West as the Soviet Union did, and Mr. Trump, while enacting policies reminiscent of President Reagan, lacks Mr. Reagan’s commitment to alliances and free trade. Defense Secretary James Mattis’s decision to resign after Mr. Trump’s decision to withdraw troops from Syria underscores the president’s ambivalence toward international engagement.In his first week he withdrew from the unratified 12-nation Trans-Pacific Partnership. He prepared to pull out of the U.S.-Korea Free Trade Agreement (Korus) and the North American Free Trade Agreement. Earlier this year he imposed steep tariffs on imports of steel and aluminum, using a little-used national security law, and threatened the same for autos.
Today, Korus and Nafta have been replaced by updated agreements(one not yet ratified) that look much like the originals. South Korea accepted quotas on steel. Mexico and Canada agreed to higher wages, North American content requirements and quotas for autos.
These represent a step back from free trade toward managed trade, but they will have little practical effect: The limits on how many cars Mexico and Canada can ship duty-free to the U.S., for example, exceed current shipments. Mr. Trump hasn’t stopped threatening auto tariffs, but for now his officials have elected instead to seek broader tariff reductions with Japan and the European Union.
.. Meanwhile, the U.S. trade deficit that incenses Mr. Trump has grown during his presidency, especially with China and Mexico, as a strong American economy sucks in imports. His exhortations to manufacturers to bring jobs back to the U.S. have largely fallen on deaf ears.
Don’t Believe the Hype About Trump’s Trade Deal with the European Union
maybe intending it as a compliment—craftily packaged together a number of small concessions and previously agreed upon initiatives which allowed Trump and his allies to hail the agreement as an American win. “This is a real vindication of the President’s trade policy,” Wilbur Ross, the Secretary of Commerce, told reporters as he travelled to the Midwest with Trump on Thursday.
In reality, the Europeans gave up little except their prior refusal to negotiate under threat.
.. Juncker’s pledge that the E.U. would import more U.S.-grown soybeans, for instance, formalized something that was likely to happen anyway. After Trump imposed hefty tariffs on Chinese steel and aluminum products, earlier this year, China responded by imposing equally hefty levies on U.S. agricultural exports, including soybeans. That made American soybeans prohibitively expensive for Chinese buyers
.. Brazil, traditionally the E.U.’s largest supplier, is now shipping more of its produce to China, encouraging the Europeans to shop elsewhere. “While China concentrates its purchases on Brazil, the rest of the world turns to the U.S.,
.. Looking years ahead, Norway’s reserves have plateaued, and the Europeans will eventually need alternative suppliers. U.S. producers could well be among them. But, again, such a result may well have occurred without Wednesday’s agreement.
.. hopefully nobody tells Trump that these concessions were largely illusory.
.. Both sides provide subsidies or tax breaks to politically powerful groups, such as farmers, and to industries they deem strategically important, such as commercial-aircraft manufacturers in the E.U. and military contractors in the U.S. These policies proved sticking points when the Obama Administration and the E.U. engaged in unsuccessful negotiations about a transatlantic free-trade treaty, and they will almost certainly prove to be sticking points again.
.. One way to think of the outcome of Wednesday’s meeting is that Trump is happy to declare a victory whenever he can get away with it. However, a more optimistic reading of this week’s developments is that Trump has finally realized that he needs the E.U.’s support in his campaign against China’s much more overtly mercantilist trade practices, and that, in this area at least, the United States and Europe have common interests.
.. E.U. officials wanted to persuade the Trump Administration to pursue grievances against China through the World Trade Organization (W.T.O.), the global ruling body for trade disputes, rather than by dishing out tariffs unilaterally. The article also noted that Robert Lighthizer, the U.S. Trade Representative, a key player in the Trump orbit, is not necessarily averse to this idea.
.. “Comfortingly, there is mounting evidence that Mr Lighthizer is not out to torpedo the WTO,”
.. If Lighthizer could persuade Trump to go down this route, and his negotiating team could construct a common front with the E.U., there is a possibility that, sometime in the future, China might be persuaded to make some real concessions in areas like opening its markets and respecting intellectual-property rights. If that did occur, the Trump Administration could claim a genuine victory.
The Double Standard of America’s China Trade Policy
As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports).
In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others.
.. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights.
.. The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”
.. Any sensible international trade regime must start from the recognition that it is neither feasible nor desirable to restrict the policy space countries have to design their own economic and social models. Levels of development, values, and historical trajectories differ too much for countries to be shoehorned into a specific model of capitalism.
.. Governments that worry about the transfer of critical technological know-how to foreigners are, in turn, free to enact rules prohibiting their firms from investing abroad or restricting foreign takeovers at home.
.. Many liberal commentators in the US think Trump is right to go after China. Their objection is to his aggressive, unilateralist methods. Yet the fact is that Trump’s trade agenda is driven by a narrow mercantilism that privileges the interests of US corporations over other stakeholders. It shows little interest in policies that would improve global trade for all. Such policies should start from the trade regime’s Golden Rule: do not impose on other countries constraints that you would not accept if faced with their circumstances.
Why China Won’t Yield to Trump
China may give Donald Trump some face-saving way out from the trade war he has started, but it won’t offer any substantive concessions. In other words, Trump’s tariffs will do nothing to improve America’s external balance, output, employment, or real wages. .. some defend Trump’s actions as a shrewd negotiating tactic to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market.
.. Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”
.. China does not necessarily even have to sell to wield influence. With US debt expanding and interest rates on the rise, even rumors that the Chinese might stop buying Treasury securities could be enough to drive down US bond prices and accelerate the increase in US interest rates.
.. While industries and consumers in China would also be hurt by a trade war, that country’s leaders can overrule interest groups and stifle protests.
In any case, public opinion will largely back retaliation against the US.
.. The Chinese remember well the Opium Wars of the nineteenth century, when the Middle Kingdom tried and failed to resist the British campaign to force it to open its economy to opium and other imports.
.. Add to that Trump’s reputation for flip-flopping, and the odds that Chinese leaders would bother making a deal with Trump to change their country’s trade policies seem small.
.. Even if China did decide to concede something to Trump, it would not be meaningful.
.. China could export less merchandise to the US directly, instead routing products through Taiwan and other countries, where some final assembly could take place.
.. The result would be economically meaningless; but so is the concept of the bilateral deficit itself, as Chinese exports to the US contain a high proportion of intermediate inputs produced in South Korea, the US, and elsewhere.
.. What really matters is that China’s current-account surplushas been falling since 2008, and now stands at a relatively small 1% of GDP.
.. America’s external deficit is growing, but that is the result not of trade policy; it stems from Republicans’ fiscal policy, which is blowing up the budget deficit and reducing national saving.
.. As for Trump’s complaints about China’s IP “theft,” there are some valid grievances on this front. But addressing this issue requires technical expertise and negotiating skill, not blunt threats based on inadequate knowledge.
Crucially, it would also require cooperation with other partners who have similar grievances with China, ideally including pressure applied through rules-based institutions like the World Trade Organization.
Trump is pursuing the opposite strategy, arguing that neither multilateralism nor bilateral negotiations work with China. Yet such tactics have helped to compel China to allow a 37% appreciation of the renminbi in 2004-2014 and to crack down on counterfeiting of US merchandise and theft of US software.
.. Trump may also want to avoid the WTO because the US doesn’t win all of the cases it brings there. But it does have a 90% success rate. And it is not as if the US has never violated international rules