The Trump administration’s re-engagement with China on trade may end with enough give on both sides to deliver a token win to Washington and a breather to jittery global investors. However, the process should not just end there, but continue for however long it takes to resolve the ultimate paradox: how the United States and other market economies can agreeably coexist with the monster hybrid economy they helped bring about.
This is uncharted territory. Let’s hope the Trump team fully appreciates the significance of the task.
Before the trade conflict with China, the United States engaged in an equally contentious rivalry with another East Asian economic power. How that one was laid to rest offers some hints on the prospects for settling the current discord.
As a witness of the fight against Japan in the 1980s and 1990s, I can vouch that it aroused even more belligerence and nativist passion than the one now in play. This was because Japanese exports’ capture of the U.S. marketplace deeply wounded America’s pride in its manufacturing prowess in a way the Chinese have not quite yet.
The Japanese Export Invasion
The Japanese invasion put Detroit on its heels and wiped out whole industries––television sets, vacuum tubes, and cameras––although part of the damage could be simply ascribed to technology obsolescence. Nonetheless, heartland Democrats, led by representatives Dick Gephardt and John Dingell, flooded the congressional agenda with hundreds of protectionist bills, with Japan as the primary target.
Ezra Vogel rang the alarm about Japan becoming “number one.” Hollywood weighed in with a conspiratorial movie called “Rising Sun.” Other writers even foresaw a revival of the shooting war with the former World War II enemy. We were saved from such a messy outcome by personal rapport at the highest level—particularly by former President Ronald Reagan and former Japanese Prime Minister Yasuhiro Nakasone––as well as by wisemen interventions that delayed protectionism long enough for the problem to wither away.
The sore point with the Japan critics was the mounting U.S. trade deficit. It’s the same issue today except that the amounts have soared to levels unimaginable in the 1980s and ‘90s. Other gripes against Japan like the monopolistic bent of its large corporate families called keiretsu and its ban against the entry of foreign-owned department stores and construction companies sounded much like what critics say today about China’s own practices. But now it’s much harder to come up with the proper remedies.
Japan’s exports then were led by its own brands like Toyota, Matsushita, and Sony. Much of the equivalent flood of merchandise from China are American-designed products like Apple iPhones, Windows-loaded laptops, or key components delivered to U.S. companies like Dell or Hewlett-Packard via regional supply chains. The major driver this time is the offshoring strategy of these American companies or, more broadly, the economics of globalization that compelled them to move production overseas.
Where The Chinese And Japanese Situations Diverge
The Trump team has to come to terms not only with Beijing, but also with those large corporations that deeply affect global trade flows. The Japanese automakers eased some of the trade imbalance angst by moving some of their capacity to the United States. By 2017, the Japan Automobile Manufacturing Association (JAMA) could report that it had 24 manufacturing plants and 14 R&D and design facilities in 19 states supporting 92,710 jobs. There have been comparable capacity relocations by Japan’s electronic giants.
But the same goodwill-earning stratagem isn’t easily applicable to China’s state enterprises like Huawei and ZTE. The scare over technology theft and cyberespionage has effectively snuffed out the prospects of Chinese transplants of the scale the Japanese have achieved.
The earlier Republican administrations put into play wonky work programs like the Market-Oriented, Sector-Selective (MOSS) talks and the Structural Impediments Initiative (SII), which had a special interest in supercomputers and semiconductors. The results were less than satisfactory, but they at least served the purpose of pulling policy-makers from both sides together to sweat out the details while holding the protectionists at bay.
The comparable Trump effort is a good deal more difficult. U.S. Trade Representative Robert Lighthizer has to deal with a Beijing bureaucracy that is far more complex and opaque than the vaunted Japanese Ministry of International Trade and Industry (MITI) his predecessors had to contend with. The “structural impediments” of this day are also more deeply rooted and intractable.
One final lesson from the earlier trade dispute: Although Tokyo’s good-faith efforts helped, it was ultimately ended by a prolonged Japanese recession concurrent with a milder economic slowdown in the United States.
“Japan-bashing,” the Japanese media wryly observed, had turned into “Japan-passing,” by which they meant that Tokyo had passed its place as the archvillain of world trade on to Beijing. This is proper warning that there could be more losers than winners if such trade disputes drag on for too long.
By the end of this review period, we should know whether the Trump team is happy enough with Beijing’s promises to lower its trade surplus with more purchases of American soybeans and Boeing airliners, or determined to pursue the more challenging part of the trade agenda.
Substantial relief for U.S. businesses would require at least a partial reversal of Chinese President Xi Jinping’s signature measures––like privileging state enterprises at the expense of foreign competitors and the controversial “Made in China” 2025 plan intended to make China dominant in ten advanced technologies. These programs are key to Xi’s vow to make China a “modestly prosperous” economy by 2020, or just a year from now, and a world-beating socialist nation by 2049, the centenary of the People’s Republic of China.
Chinese Leaders Care About Image
No Chinese leader can afford to be seen knuckling under U.S. pressure, particularly on bedrock policies vital to the Chinese Communist Party’s continued rule. Both Xi and Trump will be seriously challenged to find solutions that are substantial and equitable but also face-saving.
The stakes are such that the Trump administration has to assemble as broad a coalition of stakeholders as it can muster. Whatever political support he has is rather muted. This is partly because his trade policy implicitly repudiates the comparable record of his predecessors.
As Michael Pillsbury recounts in his eye-opening book, “The Hundred Days Marathon,” President Jimmy Carter opened the store of American science to China. Reagan and both Bushes enabled its rise, all under the mistaken assumption that such generosity would hasten its evolution into a market economy. The final giveaway to China was the grant of permanent most-favored nation (PMFN) status and entry into the World Trade Organization (WTO) under the Clinton administration.
This forbearance led to the creation of a powerful “socialist market economy” that combined a robust private sector with giant, entitled state corporations and acted at times as though exempt from WTO disciplines.
To Win, The United States Needs a United Front
President Trump needs to put all this history behind him. Both Republican and Democratic parties have to pitch in for any China policy to succeed. Trump also needs to have the business community fully on board, even though his trade advisers rue how many of the large corporations cashed in on globalization at the expense of America’s working men and women. His negotiators have to hear as well from Europe, Japan, and other global players to determine how they could all adopt to any changes in the trading order that might result from these negotiations.
In short, the process should go beyond an “America First” agenda and seek solutions in concert with other responsible global players. The softening Chinese economy could dispose Xi to yield enough ground to redress the U.S. trade imbalance and allow the Trump administration to claim some success. The optimal outcome, however, should not only please Washington, but also help in restoring the Chinese economy to some degree of sustained growth. In its most productive times, China contributed as much as 20 to 30 percent of global growth, so a healthy Chinese economy is in everyone’s interest.
The worst outcome would have Beijing refusing to dismantle its core mercantilist policies out of an excess of national pride or concerns about regime survival. That could lead to a direct challenge of the U.S.-sponsored liberal trading order. Beijing has an infrastructure-oriented Belt and Road scheme that could serve not only as alternate markets for surplus Chinese steel, but also as a backup trading system if no further benefits can be wrested from the current one.
There could be as many as 60 to 70 economies in this putative trade bloc, including a number of developed economies. During the 2017 G-20 summit in Hamburg, German Chancellor Angela Merkel, then not too pleased with U.S. trade policies, was an intent listener to Xi’s proposals. Last October, on a Beijing visit, Japanese Prime Minister Shinzo Abe felt obliged to join Xi in proclaiming a “new era” in Chinese-Japanese relations. The Chinese leader even offered Japanese construction firms a share of the infrastructure business from the Belt and Road initiative.
China As Champion of the Developing World
China has enough bargaining chips and diplomatic charm to pose as the champion of the developing world. Foreign Minister Wang Yi pressed that point home by embracing the members of the Beijing-sponsored African Cooperation Forum as China’s “younger brothers and sisters.” Whether it can live up to that promise is another question.
The United States won the world over to its liberal trading order early on because it had the largest consumption-driven economy, able to take every other country’s exports without demanding trade reciprocity. China seems interested in donning America’s former mantle. It can now boast of having the world’s largest middle class with a huge potential consumerist appetite. But its record of sustained trade surpluses even with other developing nations makes an import-led economy another doubtful Chinese dream.
A rupture with China could be avoided if some degree of statesmanship replaces the bombast and name-calling that attended the onset of this “trade war.” The rhetoric in the Chinese media seems to have cooled since then, a decidedly encouraging sign. Trump is no longer denounced as the ba—a sobriquet for oppressive ruler or tyrant deriving from the Warring States period––and Chinese negotiators are now calling for a win-win (gong ying) outcome. Making peace with its trading partners may be in China’s best interests.