Trump’s Muddled China Policy

The highly anticipated United States of America-China summit held in Florida this past week was upstaged by US President Donald Trump’s decision to bomb Syria, but the two events aren’t totally unrelated.

The decision to hit Bashar al-Assad is seen by many observers as a signal to a defiant North Korea (and by extension, its ally, China) that Trump is willing to use military force to get what he wants.

Yet the president’s tone on China has moderated rather dramatically since he was a candidate in last year’s election campaign. And as the two countries exchange diplomatic platitudes, it seems unlikely that a trade war, or any kind of negative escalation for that matter, is on the horizon.

Trump campaigned on the promise that he’d label China as a currency manipulator on his first day in office. That didn’t happen. He also constantly brought up China as one of the major reasons for the outsourcing of US jobs. This and related issues may eventually be discussed, but the summit at Mar-a-Lago seemed to produce (publicly, at least) little more than a 100-day plan for trade talks, along with some nice words.

This is a sharp contrast to Trump’s tone even earlier this year, when he tweeted, “China has been taking out massive amounts of money & wealth from the U S in totally one-sided trade, but won’t help with North Korea. Nice!”

The president’s latest post-summit remark on the US-China trade relationship—“Only time will tell”—seems an apt description for his overall China strategy, as his administration thus far hasn’t been known for predictable patterns of international behavior. Dealing with China seems to have reinforced this reputation of unpredictability, though in a much more subdued way. It’s probably not entirely wrong to interpret this as a signal of Trump’s learning curve when it comes to dealing with the world.

The U S imported 480 billion dollar worth of Chinese goods last year, while selling just 170 billion dollar worth of exports to China. This makes China the biggest contributor to America’s trade deficit (about 60 per cent). That the 100-day trade talks will address this issue first and foremost is significant. A large trade deficit usually goes hand-in-hand with a small manufacturing sector, which connects with Trump’s promise to address the outsourcing of jobs.

According to David Dollar at the Brookings Institution, “Between 2000 and 2007, US 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.” Dollar notes that up to 40 per cent of these job losses can be traced back to the huge influx of Chinese goods into the US after China joined the World Trade Organization in 2001. And though Trump threatened a whopping 45 per cent tariff on Chinese goods, it’s important to note that extreme protectionism hasn’t been shown to produce a smaller trade deficit.

China has agreed to restructure the current trade relationship in order to reduce its surplus as a way of dealing with inflation back home. Also, according to the Financial Times, “China will offer the Trump administration better market access for financial sector investments and US beef exports to help avert a trade war.”

None of this validates the kind of inevitable confrontation that Trump’s typical on-the-campaign-trail rhetoric seemed to forebode. And even though Secretary of State Rex Tillerson did call the negotiations “frank,” the broader implication of Trump’s first meeting with China seems to be that the administration, though terribly unpredictable and often reckless, is ready to demonstrate some measure of moderation when it comes to foreign affairs.

The ironic thing is that despite Trump’s confrontational words, China has actually routinely intervened recently through its central bank to keep the yuan high, which makes its exports more expensive. It would be in the US national interest to extend this. More importantly, the Trump administration should, like every other administration, try to negotiate for better access to Chinese consumers. This means prying open sectors like telecommunications and transportation, which aren’t open for foreign investment.

The other area that the US should focus on is China’s trade policies and conduct in relation to intellectual property. American companies doing business in China are constantly pressured into sharing insights and knowledge with Chinese counterparts. Even though this practice is banned under WTO rules, there aren’t many effective ways to prosecute this kind of behavior.

The latest summit has given very limited signals when it comes to the tenor of the Trump administration’s China strategy. But it seems that the focus thus far has been the trade deficit and little else.

Yet, as Peking University’s Michael Pettis notes, deficits are usually a sign of a deeper problem related to patterns of investment. Flows in trade, Pettis points out, are a result of flows in capital. Foreign money coming into the US has helped facilitate the deficit by changing the economy. The amount of money that the Chinese have been saving in the US is significant because it results in a surplus in capital, which then produces a decrease in exports (thus the deficit). China’s trade advantage is due in large part to its decreasing consumption. That’s how it racks up savings, which it then deposits into the US Chinese households earn very little relative to GDP, which results in this low level of consumption.

So instead of focusing solely on the trade relationship with China, the Trump administration should re-examine the way it has encouraged foreign investment—a term that’s always enjoyed a positive connotation in the neo-liberal age. This is very counter-intuitive, particularly since Trump has already said that he welcomes foreign investment from Japan and China. Again, this would just help increase the trade deficit and thus possibly result in a loss of jobs.

A change in the US-China trade relationship would mean a change in many years of exchange in both capital and goods. It’s unclear whether the Trump administration actually sees this and is willing to follow through at the negotiating table. The answer is probably not, which is another signal that for all the tough talk, Trump’s China strategy will actually be an extension of business as usual.

This piece was first published in The American Conservative and has been republished here with permission