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Gloomy skies

Stimson trade experts not bullish on future of U.S.-China trade relations

By: Eric Johnson
 | 
Photo: TrotzOlga/Shutterstock
   Trade policy experts at the Stimson Center, a nonpartisan Washington, D.C. think tank, are painting a gloomy picture for U.S.-China trade relations under President Donald Trump.
   Speaking at a panel discussion on the security, diplomatic, and economic ramifications of the new administration on relations with China, William Reinsch, a distinguished fellow at Stimson, said the most likely scenario was a spiral of retaliatory trade actions between the two countries.
   “There are multiple scenarios, but most don’t have happy endings,” said Reinsch, longtime president of the National Foreign Trade Council and an advisor to President Bill Clinton.
   “(Trump) will want to negotiate with them. If he begins by insulting them, they’ll say no, and that will lead him to take retaliatory action. (China) could say yes, but they would likely drag discussions out until their party congress. That will test Trump’s patience, and he doesn’t have a lot of it.
   “Now if they do decide to negotiate seriously, this administration has tended to go beyond the business issues that legitimately disadvantage foreign businesses in China and look at trade deficits. It’s not inconceivable the Trump approach could be to tell China to buy more and sell less and if not, we’ll put a tariff on it. That can’t possibly have a happy outcome. You could see China not agreeing, leading to retaliatory spiral. In the framework of what we are likely to ask for, I don’t think China is in a position to grant those things, so either Trump has to take action or fold. I think he does the former.”
   Reinsch added that Trump’s view of China itself is likely to be intrinsically different than that of past administrations, which have generally urged China to modernize and build their economy, in which case the trade deficit solves itself as the country moves away from an export-led strategy.
   Nate Olson, director of Stimson’s Trade21 Initiative, had a similarly downbeat perspective.

If you set aside the how, and think about end state, it’s costly and disruptive. It’s a bumpy road between here and there.

   “This approach that Bill described could lead us down the sad spiral,” he said. “If you set aside the how, and think about end state, it’s costly and disruptive. It’s a bumpy road between here and there. It’s costly for U.S. companies that have a presence in China, who have to unwind their operations abroad. It’s costly at the consumer level. And it’s significantly more expensive for the manufacturers that Trump prizes, because their inputs will be more expensive.
   “And it gets worse when you look at how you get there. Most paths would invite Chinese retaliation of some sort. The administration hasn’t elaborated much on how this would be pursued. They've thrown out dramatic and counterproductive ideas around tariffs.”
   The panel cautioned that only so much is known about the administration’s policies toward China because many of the relevant cabinet members and related agency staffs are still not in place. But Reinsch said it’s instructive to look at comments from Trump’s new Commerce Secretary Wilbur Ross.
   “If you listen to what he says, the rest of the world are suppliers,” Reinsch said. “You need to treat them nicely because they’re the suppliers but they need to treat us nicely because we’re the buyers. This is classic mercantilism. It’s a 200-year-old approach. That’s really where he is. The approach is 'we need a surplus.' But with that approach, you end up with global tariffs and retaliation.”
   The panel inevitably turned to discussion of Trump walking away from the Trans-Pacific Partnership, the 12-nation free trade agreement that was a lynchpin of President Barack Obama’s second term but is now essentially dead in the water. Stimson’s experts collectively noted that the United States’ decision to turn its back on the agreement was a failure of the Trump administration to understand how connected trade and economic issues are with security in the region.
   “Trade and economic and strategic issues in Asia are interrelated,” said Richard Cronin, also a distinguished fellow at Stimson. “You can’t disconnect them well. With TPP, when the U.S. decided to get into it and take it over, the (U.S. Trade Representative) didn’t want Japan in it, because they thought Japan would hold it up.”

Trade and economic and strategic issues in Asia are interrelated, You can’t disconnect them well.

   Cronin said the thinking was Japan would be overly protectionist and would try to drive too hard a bargain.
   “But (Japan Prime Minister Shinzo) Abe decided to go for it because he saw it as strategic. Same thing with Vietnam. They signed up because of China, and they saw an interest in modernizing and making their economy more efficient.
   “It’s dangerous to try to separate these things.”
   Cronin, a longtime scholar of foreign policy in Southeast Asia, noted that the Association of Southeast Asian Nations (ASEAN) are collectively the United States’ fourth largest trade partner, and the United States is, by far, the biggest investor in Southeast Asia.
   “They’re part of our supply chain,” he said. “They’re also part of China’s supply chain, a different part. There’s a lot of symmetry at the economic level. It’s too soon to tell if (the spurned TPP members in Asia are) distancing themselves (from the United States), but the main issue for U.S. in Southeast Asia is peace and stability. Key issue for U.S. is engagement and leadership. Our levers and influence are symmetrical (with China). We’ve gone a long way with our soft power.”
   Cronin noted that “China doesn’t have a lot of friends in Asia” because most of China’s neighbors “don’t like the way they deal with them.”
   “We counter China in a lot of ways because we do things differently,” he said. “You just have to hope that somebody in the admin, if not president himself, gets these relationships.”
   Reinsch said some form of TPP has to resurface at some point.
  “You know, Obama had to be talked into (TPP),” he said. “He was not inherently for it. He was told everyone in Southeast Asia would think we were abandoning them (if the United States didn’t participate). And that’s what’s happening now. Trump, not his trade people, but his national security people, will tell him we’ve ceded the region to China. And just increasing the size of the navy is not a solution.
   “The administration has made it very clear they prefer bilaterals over multilaterlas. That’s a classic Chinese strategy, ironically. I’m not sure how well it’s worked for them and I’m not sure how well it will work for us.”
   Olson added that there are “crazier ideas out there than rebranding or overhauling TPP as something else. We’ve forfeited our strategic advantage (by dropping out of the TPP). We’ve shown no indication that we understand how interrelated the economic and geostrategic pieces are in the region. And bandwidth and attention is going to be a problem if we’re going to handle things bilaterally.”
   The panel also discussed Trump’s campaign promise to make China appropriately value its currency, and how that talk has dissipated since the election.
   “Currency was a good issue 15 years ago,” Reinsch said. “Is China intervening? Yes, but they’re propping it up, not bringing it down. They could say, you think we’re manipulating? We’ll let it float, and it will drop like a stone. They won’t do it (largely because it would likely induce a flight of capital out of the country), but they’ve got to be tempted. You want to ask them to prop it up further?”

Currency was a good issue 15 years ago. Is China intervening? Yes, but they’re propping it up, not bringing it down.

   Aside from the issue of whether telling Beijing to stop intervening on their currency value would actually help the U.S. economy, Olson said that forcing China’s hand in such a way “could open a Pandora’s box of potential actions China could take if that is initiated. Perhaps they’re waiting for the Treasury Secretary to be approved, or they might have started to appreciate what they’d be inviting if they follow through.”
   On the broader topic of U.S. trade policy going forward, Olson also didn’t discount the idea that anti-trade Democrats might find an unlikely kinship with Trump, even if they disagree with him on most other issues.
   “There’s a segment of progressive Democrats pushing hard on the fundamental U.S. approach to trade,” he said. “Those voices are still out there and they’re still trying to find common cause with the president. That’s a dangerous game. They could be important and strange bedfellows to how our China and Asia policy evolves.”
   The broader problem, as Reinsch sees it, is that Trump views relationships too transactionally, and too short-sightedly, to advance policy with China as he might want.
   “What we’ve learned in the past is diplomacy in Asia is about thinking multiple moves in advance,” he said. “And I don’t sense that’s what’s going on with this administration. They’re thinking about their next move.”