Trump bucked orthodoxy on China, and it just might work

A distinguishing, precedent-breaking characteristic of President Trump’s trade policy is its focus on the trade balance. 

For over four decades, the trade account — usually a substantial deficit — has been mostly ignored by successive Democratic and Republican administrations, with the rationale being that while large and chronic trade deficits were not desirable, they were not an immediate problem and were caused primarily by non-trade factors such as America’s low savings rate and chronic deficit spending by the government. 

{mosads}“Balanced trade” was not a term used by the architects of U.S. trade policy. Instead, they worked for the “elimination of trade barriers.” 

Particularly with regard to our trade with China, which accounts for the biggest portion of our trade deficit, Trump doesn’t buy the orthodox rationale. He argues that the trade deficit is of immediate seriousness, and our bilateral deficit with China is due in large measure to Chinese trade practices, not U.S. macroeconomic policies.  

So who is right? A closer look at China’s global trade pattern suggests that Trump may have a point. In 2017, China’s trade surplus with all of its trading partners totaled around $420 billion, considerably more than its surplus with the U.S. 

Only a handful of countries have a trade surplus with China, and most of these are commodity and energy exporters. China’s many trading partners have highly diverse trade dynamics and macroeconomic policies, yet the vast majority share a sustained and large imbalance with China. 

The data argues that a major cause of the global Chinese trade imbalance is that country’s export-oriented development plan and its attendant policy of import substitution.

The U.S. has long complained about Chinese trade practices. The breadth and scale of discriminatory Chinese trade practices is highly unusual among World Trade Organization (WTO) members, if not unique. 

Successive teams of U.S. trade officials have created an elaborate, process-heavy alphabet soup of institutional fora that aim to address the problems, which include local content preferences, forced intellectual property (IP) transfers and a weak and corrupt legal framework especially at the sub-central level. 

This lengthy dialogue has proven ineffective in achieving any strategically meaningful change in Chinese practices. Many Chinese commitments remain pending; the history of these meetings largely is a history of unfulfilled promises. Especially noteworthy is the consistent lack of enforcement of agreements reached in these meetings.

The current U.S.-China trade dialogue has a good chance of breaking with this long-standing pattern of failure for two reasons:  

First, unlike his predecessors, the current U.S. president has shown a personal interest in trade policy and is focused on it. More importantly, Trump has broken with previous U.S. administrations and deployed the only leverage that matters to an export-oriented country like China: the credible threat of loss of market access. 

The unprecedented willingness to do this provides U.S. Trade Representative Robert Lighthizer a huge, game-changing advantage over his predecessors. As we have seen, even the credible threat of loss of market access has a major impact on the export-driven Chinese economy and Chinese negotiators’ attitudes. 

Given mutual interest, a win-win deal seems within reach. The U.S. will be looking for commitments on removal of import barriers, progress on the legal framework and an end to forced IP transfer. Progress on these issues should advance the U.S. goal of reducing the bilateral trade deficit. 

To avoid the mistakes of the past, any understandings must be clearly enforceable and linked to continued Chinese access to the U.S. market. 

Chinese offers for state-directed increases in purchases of U.S. goods should be viewed with skepticism; while making for good headlines, they are not sustainable if this is done through one-off, mandated purchases rather than an increase in aggregate demand for imports. 

China knows that there is no real substitute for the American market. So in exchange for these asks, the predictable Chinese demand is straightforward: continued access to the U.S. market on commercially competitive terms. 

Given that China is probably the greatest U.S. trade policy challenge, substantial progress would be an enormous achievement. Already, Trump’s trade policies are a bright spot in public perception of his administration. 

A favorable deal on China would further burnish the president’s positive track record, putting pressure on Democrats to respond with a new and appealing trade policy of their own.

Michael J. Delaney is a trade policy consultant for TransNational Strategy Group, a commercial, economic/political and policy consultancy providing services to private sector and sovereign government clients. Previously, Delaney worked as a State Department foreign service economic/commercial officer and at the Office of the U.S. Trade Representative (USTR) as assistant USTR for South and Central Asia and Iraq.