President Trump speaks to auto workers at the American Center for Mobility March 15, 2017 in Ypsilanti, Michigan. Photo by Bill Pugliano/Getty Images
During his presidential election campaign, candidate Trump frequently targeted China as the major threat to the U.S. economy. Specifically, he blamed China for the expanding U.S. trade deficit, job loss, currency manipulation, and declining manufacturing sectors. This resulted in policy watchdogs worrying about the ultimate impact on the world economy, and the bilateral relationship in particular. In this op-ed I would like to analyze the trade policy toward China under the Trump administration, evaluate its effectiveness, and what guidance this initial transition period provides for the rest of the current Trump administration’s approach to one of the most important bilateral relationship in today’s world.
As the president marks five months in office, the first question we must consider is: Has Trump fulfilled his campaign promises towards China? The short answer is ‘no.’ The bilateral trade deficit is still expanding. The manufacturing jobs have not been brought back home. He reversed his vow to label China as ‘currency manipulator’ on his first day in office. The longer version of the answer is, of course, more complicated than simply reviewing what he has (or has not) done.
Compared to the support of multilateralism under the Clinton administration (China joined the World Trade Organization in 2001), and regionalism under the Obama administration (i.e. Trans Pacific Partnership negotiation), President Trump prefers bilateralism. It seems that he believes that the U.S. would be able to gain the most by negotiating bilaterally with its major trading partners, including China. At the meeting between President Trump and Chinese President Xi Jinping in April this year, they agreed to conduct bilateral negotiations to solve some of the contentious trade issues, especially improving U.S. exports to the Chinese market. As the initial result of the 100-day action plan of the U.S.-China Comprehensive Economic Dialogue, they have reached a 10-part agreement announced by Secretary of Commerce Wilbur Ross on May 12.
Under this deal, China agreed to lift its import ban on the American beef and bioengineered seeds. It will also allow foreign-owned firms to provide credit-rating services in China, publish guidelines to let American firms offer electronic payment services there, and issue licenses to two American financial institutions to underwrite bonds. Agriculture and financial services are the two carefully chosen areas for China to make concessions. They are modest, but in areas strategically important to the U.S. and politically beneficial to Trump.
However, this is not the effective approach to address trade tensions between the U.S. and China, as the real problems have not been touched. There are many areas of bilateral trade disputes, including steel, auto parts, and lack of intellectual property protection—but the root cause is structural. As long as China continues to carry out its export-driven economic growth model through its strong state capitalism, then the U.S. business community will still have to face trade protectionism through non-tariff barriers, industrial policy, subsidies, and currency manipulation.
Of course, structural reform in China won’t happen overnight, and it does require a strong external push. Looking forward, Trump administration needs to consider the following three questions before it moves on to tackle specific trade disputes between the U.S. and China.
First, to what extent will Trump be willing to tie its trade policy with China’s foreign policy toward North Korea? If China’s currency manipulation status is contingent on the effort China has made to contain North Korea, it will send out a wrong message to China and other U.S. trading partners that trade terms with the U.S. are ‘negotiable’ and politics ‘trumps’ economics.
Second, Trump has abandoned the TPP agreement, which is economically the most comprehensive trade deal to open up the market of eleven other Asia-Pacific countries and set new trade rules (or “Americanize” domestic rules of other TPP parties) to promote U.S. business interests and politically, provide credible assurance that the U.S. will continue to engage with the region. The Asia-Pacific region is one of the most integrated in terms of production networks, supply chains and intra-regional trade, and investment. It is also the engine of global economic growth. The power vacuum left by the U.S will definitely provide new opportunity for China to fill it with its own ideas and institutional design, including the Regional Comprehensive Economic Partnership, Asian Infrastructure Investment Bank, and One Belt One Road initiatives. Consequently, middle powers and developing economies in the region will need to reconsider or recalculate their strategic interests by accommodating, band-wagoning or hedging between the U.S. and China.
Third, a clearer China policy is needed before the Trump administration can effectively address trade disputes between the U.S. and China. China is rising and its influence is expanding. The Sino-America relationship should be redefined within this context. Compared to the political and security relations, the conventional wisdom is that it is relatively easier for the U.S. and China to agree on economic issues. Some even argue that economic issues can serve as the buffer to ease the overall tension of bilateral political relations. But this long-standing consensus is now coming apart. The reality is that now China is the second largest economy and is one of the most important trading countries in the world but, the Beijing government has not adopted U.S.-style rules or acted responsibly globally. Instead, its economic policies are increasingly controlled by the visible hand of the state and have had an adverse impact on U.S. trade and economic interests. This has brought urgency for the two governments to reach a new consensus that can reflect the political and economic reality of bilateral relations that can be accepted by both countries.
Expanded trade and economic ties have brought enormous benefits to the two countries. However, in contrast to the generally supportive role played in the bilateral relations in the past, the U.S. business community now is divided in the face of global recession and China’s increasing competition. Pressure inside the U.S. for strong actions toward China has been building up, and it will become a more important factor in determining the future development of bilateral economic relations. The new development has shown that the competitive element prevails in current bilateral economic relations. There lacks a policy consensus and a vision toward a converging global economic policy, in both multilateral trade liberalization and regional economic integration. Furthermore, there is no easy solution to the existing bilateral economic tensions. The two countries should work hard to manage, if not resolve, the conflicts ahead.
