When US President Donald Trump surrounded himself with a group of economic advisers with questionable credentials and unnuanced views, it was predictable that the trade deficit the United States currently runs with China would be the next target.
With the moderating voices of former secretary of state Rex Tillerson, and former chief economic adviser Gary Cohn gone, and dissenting views from son-in-law Jared Kushner or (still) Chief of Staff John Kelly silenced, others such as Peter Navarro and Larry Kudlow have gained in influence.
Peter Navarro used to report to Gary Cohn. Despite his academic credentials, (a PhD in economics from Harvard), Navarro is considered by many to have views that are far beyond the mainstream. The Economist called them “oddball views”.
Navarro’s book and follow-up film, Death by China, summarizes these very simplistic views neatly: Agreeing with China’s entry into the World Trade Organization was the biggest mistake the US has ever made and has resulted in China being allowed unfair trade practices whereby at least 25 million US jobs have been lost and 57,000 factories closed. Kudlow, the replacement of Cohn, is a 70-year-old television personality with a very colorful past.
Add to this mix Trump’s well-known views on the effectiveness of multilateral organizations, and solo actions were to be expected. The slogan Make America Great Again carries with it a certain level of isolationism, or rejection of multilateral trade deals.
Therefore, unsurprisingly, the acts came in the form of import tariffs on aluminum and steel, with later exceptions made for several countries, but not for China.
The actions reflect Trump’s thinking in his much-touted book, The Art of the Deal: Key guidelines include “use your leverage” and “next to loyalty, toughness is the most important thing in the world”.
With the US economy seemingly doing very well, and mid-term elections due in only seven months’ time, Trump clearly wants to be seen to be tough, and believes that he has the leverage to do so. This is a very shortsighted view.
In response to the US tariffs on aluminum and steel, and further possible measures, China’s response has been careful and targeted. It still has a lot more ammunition in the armory.
Everyone understands that a situation where trade flows are exactly balanced, resulting in a zero deficit for either side, is virtually impossible in today’s complex world.
The full year 2017 trade deficit for the US with China was some $375 billion. But it should be noted that a trade deficit does not necessarily mean that something is wrong: A trade deficit often occurs in a fast-growing economy as consumers gain increased spending power and are wealthy enough to purchase more goods and services than their country produces.
Rather than being an economic issue, it really is more a political issue, as Trump continuously promised his base that he would “tackle China” and needs to be seen to keep his promises. The fact that the trade deficit actually narrowed in January is hardly mentioned by anyone.
The real American complaint that is intertwined in the trade deficit argument is that foreign companies are pressured to provide access to their technology when doing business in China, and that State-owned companies have an unfair competitive advantage.
The various pronouncements made during the two sessions — the annual meetings of the national legislature and the top political advisory body — in Beijing only a few weeks ago show that the Chinese government is fully aware of the concerns and that, where needed, change will be forthcoming.
However, Washington must realize that the historical industrial legacy of a country is not changed in 60 days. It should also be noted that Premier Li Keqiang addressed one of these concerns during his March 20 press conference when he said there will be no “mandatory requirement for technology transfers”.
Rather than enter a tit-for-tat trade war, the two countries need to sit down and talk. There is too much mutual interest and commonality to risk a real trade war.
China is taking the long view. If needed, further Chinese riposte will surely be measured, and effective. China has many more cards to play, both the carrot and the stick: Whether it is by decreasing the trade deficit, by importing more US oil, or showing force by selling off US Treasury bonds.
The Art of the Deal challenges The Art of War.
The author is a strategic adviser to both private and public sectors on China-related matters.