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Economy

Dim Prospects for Resolving U.S.-China Trade Conflict

Nov 07 , 2018

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Last week a telephone conversation between President Donald Trump and President Xi Jinping raised hopes that the two might settle their trade differences and thereby lower the extraordinary tariffs each has levied against the other’s exports. Since both will attend the G20 meeting in Argentina later this month, optimists hope that the outlines of a trade deal could be negotiated there. However, their positions remain so far apart that the prospects of a breakthrough are dim.

Most commentators have not noticed the core obstacle to a new U.S.-China trade agreement: Xi insists on a solution that reinforces international law, while, ironically, Trump rejects the law-based multilateral world order that the U.S. had championed for more than a century in favor of a results-based, transactional view of agreements. This is a return to the “power politics” of might makes right.

Yet power politics is anachronistic in an age when all countries, even the largest, are deeply embedded in overlapping interdependent webs largely spun by business relations. Trump is the proverbial bull in the China shop. Business thrives on predictability and stability, therefore American business has long supported the long-term thrust of American policy to push for a more rules-based international order. Power politics, on the other hand, introduces a large measure of instability and unpredictability into global governance. Trump boasts of the mysterious and unpredictable nature of his actions. This is indeed useful for military strategy and even in competition among business enterprises, but it is a lousy doctrine for governance of a secure international order. An effective strategy for individual business competition may spark endless rounds of unpredictable disorder if applied to statecraft.

Many Americans will be affronted by my suggestion that China is now championing major elements of the world order the U.S. helped create, whereas Trump is inclined to subvert it. U.S. media have been filled with charges of Chinese unfair trade practices, often with few details or by exaggerating a few cases of actual malfeasance into general practices. This is akin to Trump’s sweeping charge that Mexican border crossers are rapists. Similarly, Chinese are now, by definition, unfair traders. It should be surprising how many ostensible liberals reject the former, yet still embrace the latter as if it were obvious. In fact, close attention to the trade demands that the U.S. and China exchanged last May reveals this stark difference.

Perhaps the most difficult U.S. demand is to reduce the U.S.-China trade deficit by $200 billion, about half its current level. The means to attain this is not within the power of the Chinese government. Yes, China could further reduce tariffs on products imported from the U.S., as it has offered to do, but since few are high now this would not make such a big difference. Furthermore, the quid pro quo that China now wants in return for further tariff reductions is a U.S. promise to abide by WTO rules, i.e., no arbitrary tariffs that bypass those rules. Trump’s counterproposal refuses any such guarantees and instead insists that China refrain from exercising its rights under WTO procedures so as not to resist any future arbitrary action by the U.S. It amounts to demanding China’s unilateral disarmament in trade matters. There is no reciprocity in the U.S. demands. Even a prolonged trade war is not likely to induce such Chinese surrender of treaty rights.

Other U.S. demands require specific changes to Chinese law regarding intellectual property rights enforcement. However desirable this might be, enforcing such rights only increases the prices of U.S.-made products. Their high prices may still limit their appeal to Chinese consumers. I have personally observed that many branded U.S.-made pharmaceuticals are even now sold in Chinese pharmacies, but their sky-high monopoly prices limit their consumer appeal; Chinese-made medicines are so cheap by comparison. The same goes for books and software. Anything protected by U.S. copyright tends to be outrageously expensive according to the U.S. seller’s pricing strategy. That is not a problem that the Chinese government can solve. Americans have become accustomed to high monopoly prices for many products and services; Chinese are not. For example, internet, phone, and transportation services are very cheap and efficient in China compared to the U.S.

Americans probably have more power to increase their exports to China than China itself does. For example, Trump recently touted the jobs benefit of large U.S. arms exports to Saudi Arabia as the reason the U.S. cannot afford to sanction Saudi Arabia for flagrantly murdering an American-resident Saudi journalist in its consulate in Istanbul, yet the U.S. has banned all arms exports to China since 1989. Whether this is desirable or not, American companies are prohibited from selling arms and other high-tech equipment that China would like to buy. Likewise, U.S. corporations could greatly increase their sales in China by lowering their monopoly prices, but they choose not to do that. For example, Starbucks is everywhere in China, but its prices there are higher than in the U.S., despite much lower wages in China. Ironically, it is because the U.S. so strongly eschews the free market that its sales in China are more limited than they might be if the U.S. were really the competitive free market country it claims to be.

These days it is heresy in Washington to note that the free market has broader sway in China, a supposedly “non-market” economy, than in the U.S., but as one who has lived in and studies both countries, I can’t help observing that China is competitive largely because of lower costs and greater efficiency. Legitimate Chinese government subsidies that spur the rapid improvement of higher education and infrastructure matter much more for trade competitiveness than the far less significant subsidies the U.S. protests. The U.S. penchant for ever more tax cuts and deregulation, which frees monopolists to charge what they will, have left it with a decaying public and expensive private infrastructure, plus extremely expensive higher education. Monopoly pricing in health care, most high-tech services, and software further increases costs. These are the principal reasons the U.S. is losing competitiveness. Only Americans can fix these problems.

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