Is Trump wise to take on China over trade?

FILE PHOTO: A container area is seen at the Yangshan Deep Water Port, part of the newly announced Shanghai Free Trade Zone, south of Shanghai September 26, 2013. REUTERS/Carlos Barria/File Photo - RTS11VY3
Editor's note:

The problem with the U.S.-China trade relationship is that it is highly unequal and has been for a long time. What can President Trump do about the trade deficit? David Dollar explains, arguing that the most promising route for President Trump is to negotiate better access to Chinese consumers. This piece originally appeared on BBC.

Trade will be one of two key issues on the agenda, along with North Korea. But what’s the problem—and what can Trump do about it?

Buying Chinese

The problem with the U.S.-China trade relationship is that it is highly unequal and has been for a long time. In 2016 alone, the United States imported $480bn (£385bn) of goods and services from China—mostly consumer items like clothing, shoes, televisions, smartphones, laptops and tablets.

Those imports keep prices low for American consumers.

In return, the United States sold just $170bn (£137bn) worth of exports to China—including sophisticated machinery like aircraft and agricultural products like soybeans. It also makes money from services, like the education of an estimated 350,000 Chinese students in the United States.

Overall, China is the largest source of the U.S. trade deficit—the amount by which the value of its imports exceeds the value of its exports. In 2016 it accounted for about 60 percent of its overall deficit of $500bn (402bn).

The loss of American jobs

President Trump is unhappy with this state of affairs, tweeting in January: “China has been taking out massive amounts of money & wealth from the US in totally one-sided trade.” He sees a link with the loss of manufacturing jobs—and he has a point, because a large trade deficit generally goes hand-in-hand with a smaller manufacturing sector.

This is a problem, because for people without college degrees these jobs tend to be well-paying ones. During his campaign, Mr Trump spoke often of wanting to bring manufacturing jobs back to the United States and, in the first presidential debate, said: “They’re using our country as a piggy bank to rebuild China.

After China joined the World Trade Organization in 2001 there was a surge of Chinese imports into the United States, something economists called the “China shock.” Between 2000 and 2007, U.S. manufacturing jobs fell sharply, from 16.9 million to 13.6 million. The 2008 financial crisis pushed the number lower, to 11.2 million, although the number has since been fairly stable.

Workers making clothing and electronic goods were among the worst affected. It is difficult to settle upon an exact figure, but some economists think that 40 percent of these job losses can be linked to Chinese imports. However, the influx of cheap goods also created non-manufacturing jobs in the United States, because consumers had more money to spend on other things. That boosted healthcare, entertainment, travel, and leisure. So, think of the trade deficit destroying some jobs and creating others.

Open the gates

So, what can President Trump do about the trade deficit? Candidate Trump threatened harsh protectionist measures, such as a 45 percent tariff on Chinese imports, but history shows that protectionism does not reduce trade deficits.

He also threatened to name China a “currency manipulator” and at one point during his campaign went so far as to accuse it of “raping” the United States with its trade policy.

For years China intervened to keep its exchange rate low, which kept the price of its goods down and helped increase the U.S. deficit. But more recently its central bank has kept the currency high—making its exports more expensive—and it is in the United States’ interest to encourage more of this.

The most promising route for President Trump is to negotiate better access to Chinese consumers. China has many restrictions on imports, for example a 25 percent tariff on cars. And while the United States sells a lot of agricultural products to China, notably soy beans, key markets like beef and pork are highly restricted.

Probably most important for the United States is that modern service sectors like finance, social media, telecommunications, health care and transportation are largely closed to imports and foreign investment. So far there has been little progress, but opening China’s markets would offer more choice to its own consumers and would help maintain a stable relationship with the United States. China’s economy depends on keeping the trade flowing with its biggest customer.

Low expectations

Will there be a trade war? Probably not, because protectionist measures would hurt the U.S. economy and the Chinese are counting on it to be impractical. The Chinese Communist Party has an important congress at the end of the year and it will be difficult for Xi to do anything bold before then. Even afterwards, China is likely to move very gradually on market opening. Trump was smart to set low expectations for the summit.