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Brief  #15 Economic Policy

Summary

On the weekend May 18-21, a team of Chinese delegates lead by the CCP’s Vice Premier and economist Liu He met with representatives from the Trump administration to discuss trade policies and advert a potential trade war.  This comes at the backdrop of tough rhetoric and escalating tensions between the two superpowers. Last month, President Trump threatened to slap tariffs on 150 billion USD worth of Chinese product and in response, China threatened to implement tariffs upwards to 25% on a wide range of US products equaling to 50 billion USD.

Since the campaign, President Trump has accused the Chinese as conducting unfair trade practices. Some of the President claims against China includes: devaluing their currency to make Chinese markets cheaper, not respecting intellectual property rights affecting the competitiveness of American firms in Chinese markets and flooding American markets with cheap Chinese products resulting in almost a 380 billion USD trade deficit in 2017.

After the negotiations concluded, little progress on either side appear to be made. Vague gestures and ambiguous language characterized the post-negotiations press conference. China pledged to purchase more US products while both countries pledge to continue to meet and have more discussions in the future. However, Trump’s negotiation camp appears to be bitterly divided over the focus of the talks, the potential outcomes and the means of achieving different goals.

Throughout the three days, there appeared to be much confusion on the US’ side. While the Chinese were able to present a united front during the talks, the same can not be said for the Americans. The disorganization was evident when Trump’s official released contradictory statements. Some in the camp wanted statements to focus on China’s bullying and forcing American firms to share technology and intellectual property while others wanted statements and tactics to focus more on reducing the trade deficit.

On Sunday, Secretary of Treasury Steve Mnuchin said the Trump administration would “put the trade war on hold” while talks continued while that same day US Trade Representative Robert Lighthizer released a statement that said that may still resort to tariff and other measures unless China makes “real structural change.” On Friday, Trump chief economic advisor Larry Kudlow prematurely said China offered to reduce its trade surplus by 200 billion USD although such an agreement was never made.

According to Derek Scissor – a Chinese scholar at the American Enterprise Institute claims that the Trump negotiations team is divided into two camps. Secretary Mnuchin and Economic advisor Larry Kudlow represents the neoliberal faction who seek further global integration and worry about the market’s reaction to a potential trade war – a testament to their banking background. This side is seeking to make a deal as quickly as possible. The other faction includes Peter Navarro leader of the White House National Trade Council and Robert Lighthizer who are demanding China change its practices and help reduce the deficit by 200 billion USD. This faction is willing to resort to extreme trade disruptions to accomplish their goals. The rivalries between both camps is evident as they jockey for influence over the president during the trade talks.

These talks also come days after President Xi Jinping of China asked Trump for a “personal favor” by providing sanction relief for Chinese telecommunications giant ZTE which has had its operations severely crippled under the Obama administration. After bipartisan backlash in Congress, in a tweet Trump claimed “that nothing happened with ZTE except as it pertains to a larger trade deal.” Both Republicans and Democrats are steadfast in maintaining sanctions on ZTE for illegally selling products to both Iran and North Korea. Both parties feel as if Trump is placing Chinese economic need over America’s national security imperative. On Tuesday, May 23 2018, the Senate Banking Committee passed an amendment that would make it illegal for Trump to reduce penalties on ZTE unless it provides proof that the company is compiling with US laws.

Next month, in June 2018, both sides are preparing for round three of the talks with hopes that a deal can be made. However, it is unclear exactly if the potential for a trade war still exist before or while negotiations talks take place. Those in the Mnuchin camp would rather make a deal and if that isn’t possible would rather wait before implementing tough tariffs until after the North Korea summit at the very least. While those in the Navarro camp would rather use any tools at their disposal to force China to acquiesce to America’s demands.

Analysis

There is a great possibility that the disorganization and the in-fighting within President  Trump’s negotiation team  gave the Chinese the upper hand in these talks and future talks. It was very noticeable to see the divisions within the camp and China’s skilled negotiations could easily take advantage of the situation by playing both sides off one another and pandering to one side over another at advantageous times. Already, some might argue China achieved a great victory by getting the US to delay tariffs with China only vaguely agreeing to purchase “massive amounts of farm and agricultural products” according to the President’s tweet.

This chaos and confusion seems to be commonplace in the Trump administration. One might even begin to think that confusion and chaos is a part of the President’s elaborate grand strategy pertaining to trade and almost any other policy issues for that matter.  If one gives off the appearance they are confused and disoriented the other side may begin to overestimate their own abilities. However, it is difficult to see an underlying strategy in the midst of all the confusion. After the trade talks, Chinese official felt a sense of bewilderment saying that they would place any “concession” made during the talks on “hold” until president Trump gave final confirmation. Still, it is very likely China did use and will use this confusion to buttress their demands in the next round of talks.

The foundation of President Trump’s thinking as it pertains to trade and China is the belief that China is more dependent on America than America is on China. China makes hundreds of billions per year off of selling its products to American consumers. The United States is China’s largest single country trading partner accounting for about 20% of all of China’s exports. China is still an economy more heavily dependent on exports than it is on domestic consumption even though the Communist Party is desperately trying to change this. It can’t be said one way or another if the president’s line of rationale is correct or incorrect. Existing literature supports both arguments. China, on the other hand, feels like it would have the upper hand in a trade war. Although, the US market does make up a significant cross section of Chinese exports, the US is also a democracy. The US is often times constrained by the capricious desire of the citizenry. A trade war will have an inflationary impact. America’s thirst for cheap Chinese products may to be so great  as to weather a long term trade war. No one wants to walk into a Wal-Mart or Target and spend almost 35% more on clothes, electronics and other items- two stores many in Trump’s base are very fond of. Ironically, existing literature both supports and goes against this view as well. Although it can’t be concluded one way or another, most certainly  both economies are very dependent on each other and both side stands to lose significantly in a trade war. A trade war would not only hurt both  China and the US, but it would harm global supply chains across the world.

President Trump’s demand for China to reduce the trade deficit is unrealistic. The only way the deficit can be reduced is if US ships more goods and services to China, limit the number of imports or a combination of both. The US has little control over demands for its products in China just as China has little control over demands for its products in America. President Trump’s lack of understanding of basic supply and demand principles shows up in the various infeasible demands he made this weekend.

Finally, Trump’s  ZTE controversy shows his willingness to often times easily abandon his own agenda. The President has consistently abandoned beliefs that he presented himself resolute on.  This might be very problematic going forward with negotiations with Chinese officials. The Chinese are expert negotiators and have more than likely studied the President’s weakness. The President was elected to represent the American people and its problematic if the president forgets his own underlying platform. The people who will be hurt the most are those who support him and believe in him the most.\

Take Action

  1. The US-China Business council is an NGO consisting of over 200 companies that do business in China and its mission is to expand the US commercial relationship to its members.
  2. The US-China Policy Foundation is an NGO that seeks to enhance mutual understanding and positive relations between the two countries via awareness
  3. The US-China Strong Foundation is an NGO that seeks to develop relations by investing in a new generation of knowledgeable leaders.

This Brief was submitted by KAF, a USRESIST NEWS Analyst. For more information contact: kaf@usresistnews.org

 

 

 

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