Opinion - World Economy

Tariff pinpricks on China trade are useless, diplomacy is a better way

Key Points
  • The U.S.-China trade talks are taking place in an environment of mistrust and suspicions fed by acute security issues and systemic disagreements about economic and trade policies.
  • Such a difficult bilateral agenda requires patient diplomacy rather than hostile trade measures.
  • China, however, should get out of the bind it created for itself by fast-tracking the decline of its excessive and unsustainable trade surpluses with the U.S.
U.S. President Donald Trump attends a bilateral meeting with China's President Xi Jinping during the G-20 leaders summit in Osaka, Japan, June 29, 2019.
Kevin Lamarque | Reuters

China needs no warning shots about an old trade story.

It is now more than three years since Donald Trump told a New York campaign rally that China was "upset" about his trade talk, adding, for emphasis, "They are ripping us off," and pledging to put an end to that.

What was China's response to that taunt, repeated many times over, including in Trump's tweets and press statements last week?

Blissfully ignoring the taunts, Beijing pocketed, on Trump's watch, $961.8 billion in net income, with technology transfers that go with it, on its American goods trade. By the end of this year, China's net income on goods sales in U.S. markets will hit $1.1 trillion.

Trump has been politically wounded and open to attacks on, arguably, the most important economic, political and security aspects of his foreign policy.

Beijing made its money

But China should hold off on the celebratory champagne. In spite of Washington's clumsiness, or worse, the world sees the huge bilateral trade imbalance China created without much concern for political problems raised by its aggressive mercantilism.

Even Germans, China's fellow mercantilists, have moved to protect their markets and industries from Chinese traders and investors. They have now been joined by the French to fortify the European Union's trade walls to the outside world, extending protectionist policies to partner and membership candidate countries. China has received special attention in that new policy. Chinese President Xi Jinping got an earful on that from French and German leaders during his visit to France in March of this year.

But let's stay with the U.S., where the question is: What can, and should, Trump do about trade with China?

To start with, Trump should never lose sight of what his security experts told him: China is a strategic competitor and a challenge to the existing world order, also known as Pax Americana.

China, of course, bristles at that characterization as an outdated "cold war," "zero-sum-game" mentality, offering its own view of a multilateral world thriving on "win-win cooperation" and a "community of shared future for mankind."

Beijing, however, has a problem because its trade record with the U.S. shows the "win-win" mantra is, in fact, an axiomatic "I win, you lose" zero-sum-game. A "community of shared future for mankind" is a noble view of a world to strive for, but it's too ethereal as a practical political guideline.

Trump should not waste time with that. The best way to defend his trade policies is to promptly conclude agreements with the EU — essentially Germany — and Japan.

That should be easy. To get around the main problem, Germany must grant reciprocal import duties on U.S. cars to benefit from an extremely friendly 2.5% tax on its car imports into the United States. Trade negotiations with Japan are apparently much more advanced. Trump should use the forthcoming G-7 meeting in France to accelerate the completion of both trade deals.

Balance US trade now

Revised trade agreements with Canada, Mexico, EU and Japan would be proof that the U.S. is not out to destroy the multinational trading system, but just to correct excessive trade imbalances created by an unfair and unfavorable treatment of American goods and services.

That would put China under pressure to move faster toward a more balanced trade with the U.S.

So far, Beijing has not shown much sense of urgency to do that. In the first half of this year, China's trade surplus with the U.S. was down 10% from the same period of 2018, but it was still moving along at an annual rate of $334.1 billion on $440 billion (annual rate) of export sales to American markets. Particularly disappointing was the fact that, over the same period, Chinese purchases of American goods were down 19%, accounting for less than a quarter of what China sold to the U.S.

With those trade numbers, China has become an election issue in the U.S. Indeed, Washington's huge trade deficits with China can be taken to support Trump's arguments of a big China rip-off, economic war on America and alleged technology thefts — all issues that resonate with the American public and audiences around the world.

Making China trade a big political football during an election year is also tempting as Trump seeks to discredit his Democratic opponents. Soon, some of his trade experts could tell him that Chinese trade surpluses soared 30% during President Barack Obama's administration.

Is that where China wants to be in the U.S. election cycle?

China's position was also shaken in Europe. The EU's revised trade policy toward China will create problems for some member countries favorably disposed toward China's trade and investments. That could also complicate China's Belt and Road projects linked to European destinations.

Asian countries are more ambivalent. Many are welcoming China trade, but are eager to have the U.S. around as a political and security counterweight because they are unwilling to choose sides.

Investment thoughts

The U.S.-China trade talks are taking place in an environment of mistrust and suspicions fed by (a) security issues of China's contested maritime borders, (b) sovereign and territorial integrity problems with respect to Taiwan, Hong Kong and Tibet, and (c) disagreements about nuclear arms and a tenuous armistice on the Korean Peninsula. Apart from that, Washington has problems with China's economic management, trade policies and the access of U.S. businesses to Chinese markets.

Given such a difficult bilateral agenda, it is clear that solutions to trade problems are a matter of patient diplomacy rather than hostile trade measures.

China, however, should get out of the bind it created for itself by fast-tracking the decline of its excessive and unsustainable trade surpluses with the U.S.

Washington, for its part, must realize that it is dealing with a decades-old structural problem — a legacy of negligent U.S. administrations and China's determined rush to catch up with the rest of the world and lift hundreds of millions of its people from abject poverty.

China has done all that with a huge amount of American help. Now is the time to turn the leaf. The onus is on Beijing's statesmanship to quickly rebalance its crucially important U.S. trade relations.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.