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A U.S.-China Trade Agreement Is Unlikely

May 11 , 2018
  • Sara Hsu

    Assistant Professor of Economics, the State University of New York

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U.S. Director of the National Trade Council Peter Navarro

American and Chinese officials met last week to discuss a potential solution to an ongoing trade dispute that has resulted in threatened tariffs on both sides. The team of American officials, led by Treasury Secretary Steven Mnuchin, achieved little in conversations with Chinese Vice-Premier Liu He and his delegation. Liu He will visit the U.S. next week to continue to seek a resolution. At the moment, there is little reason to hope that the negotiations will end favorably. 

A major reason for the failure to negotiate successfully lies in unreasonable demands made by the U.S., which has demanded a $200 billion cut in its trade surplus with China by 2020 and no retaliation against onerous U.S. tariffs placed on Chinese imports. The U.S. has also demanded an end to China's subsidies for its Made in China 2025 plan. China has asked that the U.S. end an investigation on intellectual property violations, end the ban on Chinese exports of integrated circuits to the U.S., and alter an export ban on ZTE Corp. 

Unreasonable demands

American demands to reduce the U.S.-China trade deficit make little sense from an economic perspective, as I have pointed out elsewhere. Reducing the U.S. deficit with China means that consumers will have to purchase fewer inexpensive Chinese goods, or else China will need to purchase more American goods, which will require that Chinese consumers earn salaries to match those of Americans. The latter will take decades, as per capita income in China remains at about $10,000, trailing far behind per capita incomes in the U.S. of $52,000. At the moment, requiring the Chinese to buy an equal amount of goods from America is like requiring customers to check out grocery store clerks in exchange for the clerks checking out their customers, and represents a role reversal that doesn't fit the characteristics of either party. This is what Trump's White House is requiring. 

Requesting no tariff retaliation is equally unreasonable. Essentially the U.S. is asking to wage a trade war on China with no consequences. No leader in their right mind would allow another country to do this. This is because tariffs placed on Chinese imports will increase costs for Chinese producers and have a strongly negative impact on China's economy. This action is also against World Trade Organization policies that permit unilateral tariffs only in cases in which national security is threatened. It is quite a stretch to argue that punitive tariffs are suddenly needed to secure American borders in this case. Punishment for China’s violation of intellectual property rights has been going on for years and should be a point of negotiation, not of confrontation.

China's requests are most likely a response to U.S. threats, but are equally unlikely to bear fruit. This is because U.S. concerns about China's intellectual property rights are real: reports from numerous firms doing business in China have cited forced technology transfer as a requirement to gain access to Chinese markets, and this presents an enormous barrier to doing business in China. While the imposition of tariffs on China was a poor way to deal with this issue, the issue is real. In addition, the US. Is unlikely to entertain Chinese requests to modify the export ban on ZTE , nor should it. ZTE violated sanctions on North Korea and Iran, and failed to punish its employees involved in the activity.

Is negotiation possible?

China has attempted to assuage some U.S. concerns by pledging to further open up its economy and level the playing field between American and Chinese firms. President Xi Jinping stated in April that China would continue to expand market access to foreign investors. He has pledged also to significantly reduce tariffs on automobiles this year and to reduce foreign ownership restrictions in the auto industry. Notably, the Trump administration has made no concessions.

What is needed now is better negotiation between both parties and a lot more goodwill, particularly on the part of the U.S. Basic education about how trade works is also essential for the Trump White House, which appears to have confused trade deficits with real economic losses. U.S. Director of the National Trade Council Peter Navarro is the biggest perpetrator of such muddled thinking, pursuing the belief that U.S. protectionism will combat its trade woes with China. The rest of Trump's team appears to be following these confused ideas.

At the moment, reconciliation between the U.S. and China appears to be unlikely. If anything, China may be forced to make additional concessions. However, Trump’s brinksmanship might have backed Chinese officials into a corner, as they stand to look weak if they give the White House what it wants. It also doesn’t make economic sense to do so, for the most part, as this goes against China’s pragmatic approach to trade policy specifically and economic wisdom in general. We can have little hope for these talks; a dissipation of the tension between the two nations may be the most we can ask for.

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