Despite pessimistic nightmare scenarios, the Trump-Xi summit proved that bilateral US-Chinese relations are guided by complementary long-term goals rather than fleeting short-term friction.
THE stakes are huge. Starting with Deng Xiaoping’s economic reforms, US-China merchandise trade has grown from $2 billion in 1979 to $579 billion in 2016. Today, China is the US’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.
In the past few months, President Trump has promised to renegotiate key US free trade agreements, including the North American Free Trade Agreement (Nafta). And right after his inauguration day, he used executive order to pull out of the Trans-Pacific Partnership (TPP), which many saw as President Obama’s legacy deal.
These strategic moves take place amid a fragile international trading environment. In 2015, world export volumes reached a plateau. Since world trade is not growing, any major protectionist initiative has potential to make a bad situation a lot worse.
And while the Xi-Trump summit proved more pragmatic in trade issues than many anticipated, the meeting itself was overshadowed by a raw display of US military power in Syria. That, in turn, underscored perceptions that caution and predictability are not the first priorities in the Trump White House.
Targeting trade deficits
During the campaign, Trump threatened to use 35-45 percent import tariffs against those nations that have a significant trade surplus with the US. In the White House, his team has floated 10 percent tariffs. The manifest goal is to force the largest US trading partners to change their trade practices, which Trump has vowed to challenge with “cease and desist” letters and greater pressure for intellectual property rights (IPRs).
To signal determination, Trump’s trade warriors—the head of the National Trade Council Peter Navarro, US Trade Representative Robert Lighthizer, trade advisor CEO Dan DiMicco and Secretary of Commerce Wilbur Ross—have singled out nations that have large trade surpluses with the US.
In 2016, the deficit list was topped by China ($347 billion), Japan ($69 billion), Germany ($65 billion), Mexico ($63 billion), and Canada ($11 billion).
In substance, the Trump administration’s bilateral deficit obsession is a relic from the mercantilist era. Moreover, US trade deficits are neither recent nor bilateral. Historically, these deficits began in the 1970s, not with China’s rise in the 2000s. They have prevailed for more than four decades with Asia; first with Japan, then with the newly industrialized Asian tigers and more recently with China and emerging Asia.
Nevertheless, Trump has turned US trade deficits into compelling social facts. Since he won the presidency with his mercantilist rhetoric, he needs perceived deficit concessions.
A split White House
At Mar-a-Lago, besides the Trump-Xi talks, US Cabinet officials held meetings with their Chinese counterparts. Led by the Treasury Secretary Steve Mnuchin, the economic teams had a breakfast meeting last Friday, while a trade meeting included Commerce Secretary Wilbur Ross and Director of the National Economic Council Gary Cohn.
It was a Goldman Sachs play. Cohn is the investment bank’s former president; Mnuchin, its former hedge fund manager. The two support a tough but more cooperative approach with China.
Indeed, it is a not-so-secret-secret that the White House’s advisers have been split by internal battles between those Trump advisers (Navarro, DiMicco), who advocate aggressive measures to challenge China on trade, and their opponents (Mnuchin, Cohn), who prefer a moderate tone. While sympathetic to the trade hawks, Ross tends to lean on the moderates.
Like Trump, the White House’s trade pragmatists know only too well that short-term wins in trade battles could easily be undermined by long-term friction in bilateral relations that could hurt broader and vital US fiscal, monetary, defense and security interests.
Before the summit, the White House hoped President Xi would in some way address Trump’s concerns about the US trade deficit with China. In particular, Navarro and DiMicco have repeatedly highlighted issues of overcapacity.
Beijing has pledged to reduce overcapacity in steel and aluminum, but the central government has not yet engaged in broad plant closures. Instead, local governments, which depend on factories for taxes and employment, still maintain substantial production levels. If these issues were addressed behind closed doors, the Chinese negotiators may have reassured the Trump advisers that broad-scale plant closures are in the agenda but that they are likely to ensue after the important Chinese politburo summit in the fall.
Tough economic reforms require political consensus in both China and the US.
Furthermore, like the Reagan administration did with Japan in the 1980s, the Trump administration may have also hoped for a deal in which China would “voluntarily” agree to limit production and exports to carry out its pledges about overcapacity and to ease trade tensions.
However, China is neither Japan nor dependent on the US alliance system in Asia Pacific, as Japan is. Moreover, US-Chinese trade involves much more than autos and consumer electronics. Consequently, incentives for voluntary restraints are marginal.
A compromise trajectory
After the two-day summit at Mar-a-Lago, the US and China announced a 100-day plan to improve strained trade ties and boost cooperation between the two nations. Trump negotiators characterized the first Trump-Xi summit with references to “positive” chemistry.
-Treasury Secretary Mnuchin saw “acknowledgment” from the Chinese side that two nations need a “more balanced trade environment,” while Commerce Secretary Ross believed the two sides agreed to speed up trade talks to recalibrate their bilateral imbalance. “This may be ambitious, but it’s a big sea change in the pace of discussions,” Ross said.
While the Trump advisers said the US goal was to increase American exports to China, no details were offered about how they planned to achieve that goal.
Did the summit resolve US-Chinese bilateral challenges? Of course, it did not. Nor was it expected to. Differences are not the point; dialogue is. As Xi said at Mar-a-Lago: “There are a thousand reasons to make the Sino-US relationship work, and no reason to break it.”
That’s where the Trump-Xi summit did succeed—it paved the way for a sustained dialogue and potential compromise trajectories, despite differences.
The author is the founder of Difference Group and has served as research director at the India, China and America Institute (US) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/