Browsing the blog archives for May, 2019.

What many commentators don’t understand about US-China trade negotiations


Many of the commentators analyzing the US-China trade negotiations are making assumptions that are not entirely accurate. I will address 3 of them here.

First, Chinese leaders recognize that free markets drive economic growth. As a rule, Chinese leaders seek to shape markets, not follow them. They talk a lot about “free markets” and “free trade,” but Beijing controls much of production and consumption. Foreign markets (including the US) influence Chinese producers, but state control of the banking and other industries effectively prohibits Chinese firms from competing as they wish. Many Chinese companies benefit from government subsidies, but there are always strings attached.

Second, Chinese leaders are willing to adapt to the established Western understanding of global trade. This is only partially true today. Chinese goods are embedded in the global marketplace, and adding tariffs or removing these good altogether will hurt US firms and consumers. Chinese leaders accept the inevitability of negotiations, but they like their approach to managed trade. It’s benefitted them in the past, and they are not ready to abandon it.

Finally, China must agree to a free-market arrangement to get a deal. All nations would eliminate trade barriers in a perfect world, but a package that includes bona fide progress on issues like intellectual property and state subsidies can and should be acceptable even if these issues are not totally resolved. The global trajectory over the last several decades has favored free markets and will likely continue but change rarely occurs overnight.

I continue to believe that the greatest impediment to a trade deal is the 2020 elections. If President Trump is not reelected and the new administration is willing to soften the US stance, then holding out will prove to be an effective strategy for the Chinese. If only the Democrat contenders could stand with the President on this issue, the incentive to wait would be removed.


Getting a Trade Deal with China


Prospects of a trade deal with China are unclear. I’ve always believed there will be an agreement—and I still do—but it will require a lot of compromise. If you think about the ongoing negotiations as a poker game, both sides still hold valuable cards. Here’s how I see it.

The U.S. is in an overall position of strength. A reduction in free trade between China and the U.S. inevitably hurts both nations, but Chinese dependence on exports to the U.S. is greater than U.S. dependence on Chinese imports. The U.S. economy is growing rapidly and is better situated to absorb the negative effects of tariffs.

But the U.S. has some vulnerabilities as well. President Xi and other Chinese leaders typically stay for the long haul. President Trump is subject to a 50/50 election in 2020, and if he doesn’t win, a Democratic president could be willing to cut a better deal for Beijing. Stalling might be more costly for China in the short term, but not necessarily over the long haul.

China also wields a lot of influence over North Korea and can exercise this leverage positively or negatively to get a favorable deal. If China can help denuclearize the Korean peninsula, President Trump is likely to give more on the trade issues even if this is not an explicit part of a trade agreement. And he probably should.

There is one thing the U.S. could do to strengthen its position immensely. If leading Democrats like Biden and Sanders demonstrate unity with the President on this issue, it will send a strong message that the deal will not get better for China in 2020 regardless of who wins the White House. Of course, this issue creates a quandary for the Democrats. If supporting the President leads to a pre-election deal, then Trump gets a substantial political win on an issue pivotal to crossover Democrats and moderates. Standing with Trump on China will help his reelection effort.

I rarely agree with Chuck Schumer, but his recent support for tough negotiations with China is welcome. Wouldn’t it be great if the Democrats seeking the oval office could do the same? I’m not counting on it.