Trump, TPP, yuan SDR make US-China Joint Commission trade talks a very different scene

US President Barack Obama (L) and Chinese President Xi Jinping shake hands.
How Hwee Young | AFP | Getty Images
US President Barack Obama (L) and Chinese President Xi Jinping shake hands.

As the annual U.S.-China Joint Commission on Commerce and Trade (JCCT) gets underway in Washington D.C., the backdrop could hardly be more different from a year ago.

In 2015, each side in the series of annual meetings that cover everything from agriculture to cybersecurity had its own policy advantages, and policy continuity was the result of years of work by both sides.

Just a year ago, enthusiasm for the Trans-Pacific Partnership (TPP) also remained strong, with an official signing ceremony in Auckland, New Zealand, just months away. The agreement was positioned as America's last, best hope to stay relevant in Asia's economies.

And by design, the agreement positioned China as an outsider in its own neighbourhood, instead lining Asian countries up behind aging American assumptions around trade, intellectual property and services in the world's fastest-growing region.

Also around the same time, the International Monetary Fund (IMF) announced China's inclusion in the Special Drawing Rights (SDR) basket, an exclusive reserve status that the IMF had previously conferred only on the dollar, euro, pound and yen. Through SDR status, the IMF granted the renminbi a legitimacy coveted by many central banks, but seemingly necessary for the world's second biggest economy. In short, it helped to transform the renminbi from a transactional currency for global trade into an investment currency.

Much of the past year seemed to imply a smooth glide path for both the TPP and the renminbi.

There was a calm assumption that the TPP would likely pass through the U.S. Congress in the "lame Duck" session in December, even if that would require a strong win by Hillary Clinton in the presidential election and a reversal of the Republicans' Senate majority to strong-arm both outgoing and remaining senators to ratify the treaty.

As a result, the outcome of the U.S. election surprised many, including President Barack Obama, who overestimated the enthusiasm for trade among American voters. With Donald Trump's win, U.S. hopes of TPP ratification evaporated, as the pact cannot go into force unless both the U.S. and Japan ratify it.

A similar fate has fallen on the US-China Bilateral Investment Treaty, which is also well advanced but highly unlikely to be ratified by the U.S. Senate even if the final touches are miraculously agreed in the coming weeks.

On the flipside, China gained SDR accession by promising a prudent currency policy, which has not quite panned out as expected either.

While China announced a small 1.9 percent devaluation in the week following the SDR announcement, the renminbi has devalued by as much as 11 percent since the announcement, closing last week at nearly 6.9 to the dollar. While China's devaluation is hardly surprising given regional currency-driven politics – especially in Japan – the double-digit fall does very little to quell accusations China is a "currency manipulator," as President-elect Trump claimed many times while on the campaign trail.

And while the renminbi's influence is growing, it currently comprises just over 1 percent of global foreign exchange reserves, so there is little danger of dollar displacement in the very near term

Nonetheless, China is responsible for nearly 14 percent of global trade, compared to just under 12 percent for the U.S., so the prospects for invoicing, trade finance, commodities purchases and foreign investment in renminbi over the medium term are high and the U.S. is justifiably concerned with China's unofficial policy of devaluation into dominance.

But the dialogue is about more than just currencies and trade. The U.S.-China Business Council – a U.S.-based advocacy organization - has dozens of technical recommendations, from non-tariff barriers in food to regulatory and legal dispute mechanisms to treatment of foreign retailers and government procurement. Many of these are worthy recommendations that would remove competitive barriers and the home-market advantage of Chinese firms. Few who have worked in China over a protracted period fail to understand the drag these official hurdles can place on a foreign organization's costs and reputation.

But these sound recommendations to remove barriers to competition aren't expected be removed soon. The prospect of "levelling the playing field," which we often hear from politicians and advocacy groups, may get bogged down in bureaucratic process over the next decade or more.

The more immediate concern is overcapacity in the Chinese economy and government subsidies to Chinese firms. According to Wind Information, a Chinese financial data firm, and The Wall Street Journal, 11-14 percent of the profits of Chinese firms are attributable to government subsidies and spending. Steel is just one example where subsidies have led to overcapacity. Although the Chinese government has announced plans to consolidate capacity in the coming years, substantive progress remains to be seen.

China is, no doubt, a vibrant market economy in many ways, but economic liberalization and the transition to services is necessary to lighten domestic manufacturing's overcapacity and inefficiency. Despite years of discussion of a transition toward services, only around 18 percent of the Chinese economy is in the services sector (once the government portion of services is removed).

That's an astoundingly light allocation for an economy so large and it's a sector that can grow dramatically once central planning shackles are removed.

Real progress is needed at this year's JCCT, but uncertainty around the U.S. presidential transition will cast a long shadow over the discussions.

The Chinese government expected a Clinton presidency as a fait accompli and is ill-prepared for the policy priorities of a Trump administration. Small progress will be made, but the Chinese delegation understands the incoming administration will decide anything of substance. There is, clearly, a new sheriff in town and U.S.-China policy continuity be the first casualty.

Tony Nash is the founder and chief executive of data analytics firm Complete Intelligence, and a frequent public speaker on economics, risk and industry.

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