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.
.. 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