Improving upon Trump’s high-risk, low-yield China trade policy

U.S. President Donald Trump, surrounded by business leaders and administration officials, prepares to sign a memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington, U.S. March 22, 2018. REUTERS/Jonathan Ernst
Editor's note:

Why does it matter if the United States and China clash over trade issues, and what is a better path forward? Ryan Hass explores these and other issues, in a piece originally published by China-U.S. Focus.

The foundations of the United States-China relationship are as brittle as they have been in decades. A confluence of factors from both sides of the Pacific have pushed the relationship to its present precarious point. China’s mercantilist economic policies bear a significant brunt of the blame, along with China’s growing military assertiveness, internal suppression of dissent, non-responsiveness to legitimate U.S. concerns on trade, efforts to influence American political discourse, and injection of ideological tension into bilateral relations. Rather than pursuing a serious strategy to tackle specific problems, though, the Trump administration has embraced an undisciplined instinct for confrontation. Such an approach will not generate greater Chinese responsiveness to U.S. concerns, but it could do harm to American businesses and workers.

In Washington, a lack of emphasis on policy coordination has enabled various parts of the U.S. government to interpret Trump’s rhetoric on China as permission to pursue their preferred initiatives. The result has been a cascade of near-simultaneous actions—on Taiwan, Tibet, trade, technology, law enforcement, and maritime issues—which have overloaded the circuits in Beijing. Such an absence of prioritization in the relationship has removed any pretense of American seriousness in seeking to resolve specific problems, and instead has reinforced suspicions in Beijing that America’s efforts are animated by anxiety about its decline and China’s rise.

On trade issues, in particular, the Trump administration has not conveyed a consistent, coherent narrative that defines specific concerns, identifies clear objectives, and articulates a strategy for achieving those objectives. Instead, President Trump has fixated on the trade deficit, while his Treasury secretary has talked about negotiating a deal with China, and his trade representative has harped on the need to change China’s economic model. At the same time, President Trump regularly talks in glowing terms about Xi Jinping as if he were disconnected from the Chinese policies the administration opposes, thus deflating the pressure American trade officials are trying to exert.

Meanwhile, by taking new steps on Taiwan at the same time as threatening tariffs, the Trump administration has diluted the focus on trade and diverted Beijing’s concentration toward pushing back on Taiwan. Trade and Taiwan compete for top billing in Beijing these days, to the consternation of American trade hawks who are seeking to focus China on its need to dismantle its industrial policies.

The Chinese have responded with a combination of bewilderment and steadfastness. In addition to concluding that Trump has little interest in the substance of governing or little control over the levers of power, many in Beijing also believe Trump lacks conviction to sustain a strong push to alter China’s economic model. The mainstream Chinese view is that Trump is a dealmaker in search of a better bargain than his predecessors could secure, or at least one that could be portrayed as better. But in the event the Trump administration organizes itself to challenge China’s economic model, Beijing is laying the groundwork to defend its economic system.

Domestically, President Xi has begun girding the public for a fight. He has called for China to stand firm, become more self-reliant, and reduce dependence on the United States. Chinese state-controlled media have signaled that the state-led sector will maintain a central role in the Chinese economy, the Made in China 2025 initiative will stay intact, and the state-backed Belt and Road Initiative will move forward. Xi also has used U.S.-China trade tensions as a rallying call for China to indigenize development of chips, semiconductors, and other inputs for the high-technology industries of the twenty-first century.

So, why does it matter if the United States and China clash over trade issues, and what is a better path forward?

A likely consequence of these dueling approaches will be a test of political pain tolerance between Trump and Xi. Xi will enter the challenge with the tools to: impose geographically targeted tariffs; squeeze American firms operating in China using regulatory pressure points; push down markets and shrink Americans’ IRA accounts; paint the United States as the unilateralist instigator and China as the “principled protector” of the global trading system; and dilute American pressure on North Korea to denuclearize.

With full control of his government and of the Chinese media narrative and no referendum on his performance on the horizon, Xi believes he has an advantage over Trump, who faces midterm elections in November and a reelection campaign in 2020. Even though China would lose more in an economic battle of attrition, Xi believes China’s political system enables him to absorb more pain than Trump.

From a domestic political perspective, Xi also benefits by standing firm and enjoying the rallying effect of unified opposition to U.S. attempts “to keep China down.” He puts himself in jeopardy if he is seen as capitulating to pressure from Trump or overseeing the collapse of the Chinese economy.

At the same time, Trump also has major cards to play with China. China’s comparatively low level of U.S. imports gives the United States an advantage in tariff escalation because Beijing will run out of targets before Washington. Washington also has ample room to tighten inbound and outbound investment screening, and the ability to further restrict the export of key inputs for China’s economic modernization, thereby slowing China’s climb up the value chain. Washington also could restrict visas for Chinese students, including in STEM fields, to thwart the transfer of know-how, although in practice, Chinese students would simply shift their attendance to British, Canadian, Australian, and other universities and laboratories.

If both sides commit to a race to the bottom, there would be no winners, just losers. Such a downward spiral could lead to economic disengagement, and over time, decoupling of the world’s two largest economies and trading powers. An economic divorce would be financially costly for both sides. It would produce in China a generation of ill-will toward America paired with an overdose of nationalism. An end to U.S.-China economic interdependence also would deprive leaders in Washington and Beijing of a coolant for controlling escalation when incidents arise.

Given these factors, the United States confronts a dilemma on trade. The status quo—a Chinese state-led economic model that favors national champions, disadvantages U.S. competitors, and distorts global industries—is no longer acceptable, given the central position that China now occupies in the global economy. A narrow deal for China to buy American goods to temporarily shrink the trade deficit would be tantamount to kicking the can down the road. And Washington’s current approach of using high decibel unilateral threats to extract Chinese concessions holds little hope of meaningful progress.

Some American market participants are hopeful that risk will be contained because Trump routinely threatens extreme positions and then falls back to conventional policy terrain, and also because personal chemistry between Trump and Xi will put a floor under the relationship. While it would be a mistake to ignore these factors, it might also be naïve to rely upon them: particularly since Trump signed Taiwan legislation during China’s National People’s Congress—which many in Beijing interpreted as a “slap in the face” for Xi —the likelihood that Xi would do anything to make life easier for Trump has diminished considerably.

If Washington is serious about altering China’s economic and industrial policies, it must focus the relationship on these issues and then redefine the costs/benefits for Beijing. On specific concerns, Washington could use the threat of targeted sanctions to press the Chinese to enter into time-bound negotiations to address solvable problems. More broadly, the United States could muster a strong chorus of countries and companies that each underscore to Beijing a uniform set of specific priority requests about areas where it needs to adjust its practices. In other words, Trump could shift the problem from a U.S. vs. China contest of wills toward a world vs. China effort to create a level playing field for all to compete fairly in the 21st century global economy.

Many countries, not just the United States, are disadvantaged by China’s unfair trade practices. Rather than confront the challenge alone, the United States should work to address the problem as a team sport. Doing so would be more effective and less costly than hoping U.S.-China tit-for-tat tariffs do not do significant harm to American workers, but do lead to a change in China’s economic policies.