On China, Trump Risks Repeating Experience of Bush and Obama

President Trump, worried about economic and political fallout of trade conflict, may not demand China change its most problematic practices

Yet Mr. Trump may now be tempted to settle, like his predecessors, for less than ironclad commitments by China to structural change, though for different motivations: a higher stock market and happy farmers. Reportedly, China has yet to meet key U.S. demands to end forced technology transfer and other discriminatory practices. Yet Mr. Trump has waived the March 1 deadline and begun preparing for a summit with Mr. Xi.

Such a summit “cannot be allowed to fail,” says Brad Setser, who worked on China trade under Mr. Obama and is now with the Council on Foreign Relations. Andy Laperriere of broker Cornerstone Macro told clients this week: “It’s obvious Trump wants a deal, and the standard for what he considers a good deal continues to get lower.”

This undermines U.S. Trade Representative Robert Lighthizer’s leverage, which rests on a readiness to walk away and carry out threatened tariff increases.

Ironically, Mr. Lighthizer is an authority on past presidents’ failures to change China. “We are told that the United States needs China’s help on a range of geopolitical issues,” he testified to a Congressional panel in 2010 as a private attorney. But this would simply let China’s misbehavior “continue indefinitely; there will always be some type of crisis where we could use China’s assistance.”

The U.S. should not have forsworn unilateral trade laws in favor of the WTO, he said, which is “simply not designed to deal with a legal and political system so at odds with the basic premises on which the WTO was founded.”

Mr. Lighthizer has angered U.S. allies for sidelining the WTO and hitting them with tariffs on steel, aluminum and, possibly, cars. Still, even critics admit he has gotten China’s attention—and roiled the markets—in a way prior administrations haven’t. China’s economy has clearly suffered in response: Manufacturing activity and exports have slowed sharply in recent months.

China has reportedly agreed to buy more American soybeans and natural gas, strengthen intellectual property protection and increase foreign access to some sectors such as finance. However, it may have done most of that anyway.

Groups such as the Business Roundtable and the U.S. Chamber of Commerce have a long list of what a genuine deal would include, such as the

  • lifting of foreign investment restrictions and
  • requirements to store data locally. Additionally, China would grant
  • licenses to foreign companies without a Chinese partner and
  • repeal central and local government preferences for domestic suppliers in strategic sectors. Further, cybersecurity regulators
  • wouldn’t require the disclosure of source code;
  • an independent arbitrator would hear intellectual property disputes, with the WTO receiving appeals; and China would
  • publicize all subsidies to state-owned enterprises, as required by the WTO.
.. Mr. Xi may never agree to such steps if he believes they infringe on Chinese sovereignty or undercut its economic aspirations. He may also bet that if the U.S. won’t do business with China, others will. Indeed, Huawei’s global market share is growing, according to Dell’Oro Group, even as the U.S. presses allies to boycott it.

And if he settles for something less? It would have been better to have done nothing, says Scott Kennedy, a China expert at the Center for Strategic and International Studies: “We wouldn’t have damaged relationships with our allies or created volatility in the markets for two years.”

From Greg Ip: In Davos, Nobody Knows Anything, and That’s the Problem

The raison d’être of Davos is intelligence gathering. Hedge funds go to chat up CEOs, CEOs go to chat up politicians, politicians go to chat up donors, and journalists go to chat up everyone.

This year, all that chatting is yielding distressingly little intelligence, and that helps to explain why the mood here, and indeed over the world economy, seems so dark.

Here are the questions people here most want answered: How will Brexit be resolved? No one knows, certainly not British parliamentarians or cabinet ministers. When will the federal government shutdown ends? Nobody knows. Will the U.S. and China reach a deal to avoid all-out trade war by March 2? Nobody knows. This isn’t because no one from the Trump administration is here; if they were, they wouldn’t know, either (or so the people here who have dealt with Trump have concluded).

In the economy uncertainty is, of course, a constant. Businesses, markets and investors are used to working with probabilities rather than certainties, whether it’s the outlook for profits or interest rates. But with today’s problems you can’t even assign probabilities. Since Mr. Trump himself does not seem to know what he wants out of the China trade talks, how can you judge the odds and provisions of a deal?

How do you assign a probability to Mr. Trump or Democrats breaking a promise to their bases, as would be necessary to end the partial federal shutdown? Shutdowns used to treated as localized natural disasters, Harvard economist Ken Rogoff noted on a panel moderated by Journal editor Matt Murray: painful for those involved but without national repercussions. This shutdown, he said, is like one local disaster after another, each worse than the one before. In such a situation, “We don’t know what happens.”

As for Brexit, French finance minister Bruno Le Maire, asked about reopening the European Union’s deal with Britain, shrugged: “It’s up to the British people and British politicians to decide what they want.”

“Nobody knows anything,” screenwriter William Goldman once said of making hit movies. Too bad he died last year; he could have taught Davos a thing or two.

The Sum of Some Global Fears

Setting the table for a smorgasbord recession.

The last global economic crisis, for all its complex detail, had one big, simple cause: A huge housing and debt bubble had emerged in both the United States and Europe, and it took the world economy down when it deflated.

The previous, milder recession, in 2001, also had a single cause: the bursting of a bubble in technology stocks and investment (remember Pets.com?).

But the slump before that, in 1990-91, was a messier story. It was a smorgasbord recession — a downturn with multiple causes, ranging from the troubles of savings and loan institutions, to a glut of office buildings, to falling military spending at the end of the Cold War.

The best guess is that the next downturn will similarly involve a mix of troubles, rather than one big thing. And over the past few months we’ve started to see how it could happen. It’s by no means certain that a recession is looming, but some of our fears are beginning to come true.

China: Many people, myself included, have been predicting a Chinese crisis for a long time — but it has kept not happening. China’s economy is deeply unbalanced, with too much investment and too little consumer spending; but time and again the government has been able to steer away from the cliff by ramping up construction and ordering banks to make credit ultra-easy.

But has the day of reckoning finally arrived? Given China’s past resilience, it’s hard to feel confident. Still, recent data on Chinese manufacturing look grim.

And trouble in China would have worldwide repercussions. We tend to think of China only as an export juggernaut, but it’s also a huge buyer of goods, especially commodities like soybeans and oil; U.S. farmers and energy producers will be very unhappy if the Chinese economy stalls.

China Is Counting On Trump-Xi Meeting to Settle Trade Fight

The invite comes as Mr. Liu delivered a package of modest concessions for the trade talks that started Wednesday, the people said. It includes more Chinese purchases of U.S. farm and energy products and promises to invite more American capital into the manufacturing and financial-services sectors.

But the offer falls short of what Washington has been asking for, which includes deeper changes in what it calls Beijing’s protectionist industrial policies that hamstring U.S. competitors. The two sides are still far from a deal, and they aren’t expected to agree today to a written framework with blanks left for areas where there is disagreement—the kind of document that is standard in trade negotiations.

“We are in the fifth inning of a nine-inning game,” said Mr. Brilliant. “The president sees this as an historic opportunity, but the question is whether the administration can deliver on a comprehensive deal with the Chinese.” The U.S. Chamber, along with many business groups, have been pushing the White House not to settle too easily with the Chinese and to insist on significant changes in Chinese industrial and technology policies.

.. By agreeing to a meeting, some of Mr. Trump’s advisers believe the president is putting himself in a position where he will face enormous pressure not to escalate tariffs on Chinese goods from 10% now to 25% on March 2, as he has threatened. That’s because the build-up for the meeting—and the expectations of a deal—will be so high that a negative outcome would tank markets globally and batter both economies.

That is especially the case if the two leaders were to meet in China, as Chinese officials want. A decision then to raise tariffs would be a slap in the face for the Chinese leader, whom Mr. Trump regularly refers to as a friend. Instead, the pressure would be on the U.S. to reduce tariffs.

..  even keeping the current 10% tariffs in place “would be hard for Xi Jinping to accept.”

.. At the same time, Beijing is also unlikely to accept U.S. demands to remake its industrial policy and scale back the role of the state in the economy, said Cornell University China expert Eswar Prasad.

.. “The more likely scenario is a deal where Trump declares victory, which is relatively modest in scope, and the two sides de-escalate tension and continue discussions on complicated issues left unresolved,” said Mr. Prasad, who speaks regularly with Chinese officials.