By Clay Chandler
May 19, 2018

Last week in this space I pondered the possibility that, for political reasons, Donald Trump and Xi Jinping might prefer a protracted standoff over trade to a negotiated settlement. In the wake of Chinese economic adviser Liu He’s visit to Washington this week, it appears that I was wrong. Both sides now seem eager to do a deal.

On Monday, Trump stunned Republicans and Democrats alike by announcing via Twitter that he had ordered the U.S. Commerce Department to reverse a ban on sales of U.S. products to Chinese telecommunications company ZTE. On Thursday, it emerged that his ZTE U-turn was part of a broader accord in which the U.S. would withdraw its threat to slap tariffs on $150 billion of Chinese imports in exchange for promise that China would forego pending tariffs on U.S. sorghum exports and dramatically ramp up purchases of American products. It has been widely reported in the U.S. press that Beijing will commit to reducing China’s current $375 billion trade surplus with the United States by $200 billion over the next two years, mainly by increasing Chinese purchases of American soy beans, natural gas and commercial aircraft.

It’s hard to know what to make of such a “grand bargain.” The reported terms of the deal are difficult to justify on economic or national security grounds. Even allies were baffled by Trump’s claim that he was reversing the ZTE deal for fear that too many Chinese jobs would be lost; wasn’t the whole point of his trade war to protect American jobs? His about-face has offered a reprieve to a company that blatantly flouted U.S. import sanctions against Iran, even as Trump moved to scrap the existing nuclear accord with Iran on the grounds that it wasn’t tough enough.

The real puzzler is Trump’s offer to abandon tariffs in exchange for a Chinese promise to reduce the bilateral trade deficit. It remains unclear what, exactly, Beijing has proposed. U.S. accounts notwithstanding, reports in China’s state-owned media deny Beijing has committed to reducing the deficit by a specific dollar figure. Economists and trade experts, meanwhile, warned almost unanimously that reducing the deficit by $200 billion within two years is an impossible task.

For one thing, the U.S. economy is functioning at or near full capacity, so it’s unclear where American companies will find the workers, factories and equipment to answer increased demand from China. For another, the trade math doesn’t add up. Even under the most optimistic assumptions, increased U.S. farm exports to China won’t reduce the deficit by anywhere close to $100 billion. Boeing might be able to increase the overall number of aircraft it produces over the next two years by a handful of planes, but not enough to slash the deficit by hundreds of billions of dollars. The company might shift to Chinese airlines some of the aircrafts it is producing for customers in Europe, but that would affect only the bilateral trade balance with China while leaving America’s global deficit unchanged.

The Chinese would happily increase their consumption of U.S. semiconductors and other high-tech products. But U.S. legislators in recent years have sought to restrict such sales rather than encourage them. Similarly, China would love to be able to purchase American-made military hardware, but the U.S. has banned arms sales to China since leaders of the Communist Party ordered Peoples Liberation Army forces to open fire on democracy advocates in Tiananmen Square in 1989.

The deal makes more sense if seen through the prism of Trump’s parallel parlay with North Korean dictator Kim Jung-un, who this week called an abrupt halt to preparations for a summit with Trump in Singapore to finalize arrangements for dismantling North Korea’s nuclear missile program. As Trump himself observed this week, Kim threatened to back out of the summit immediately following a May 8 meeting with Xi Jinping. Trump has speculated publicly that Xi might be “influencing” Kim. So has Trump concluded that the only way he can close a deal with Kim is to back off on Xi? Is he betting that China’s pledge to reduce the deficit gives him enough of a fig leaf to declare his China policy a success in the 2020 presidential campaign, and that the vagueness and implausibility of that promise won’t matter if he signs an historic accord with North Korea?

It’s far easier to understand why a deal focused solely on adjusting the U.S.-China trade balance would appeal to Xi. The Chinese leader will simply order state-owned firms to shift purchases of soy beans, gas, and other products to the U.S. at the expense of other trade partners. If all the U.S. cares about is reducing the deficit, Beijing will remain free to protect home-grown firms, pressure foreign companies to surrender cutting -edge technology as the price of entry into China’s market, and lavish state subsidies on domestic players in high-priority sectors like semi-conductors, industrial robots and artificial intelligence.

The perverse outcome of Trump’s insistence that the Chinese government do whatever it takes to reduce the trade imbalance would be an even larger role for the state in China’s economy. The terms of the U.S.-China trade deal, at least as they have been reported thus far, will only perpetuate the industrial policies and political structures that created that imbalance in the first place. As an anonymous source quoted in Politico put it, this isn’t the art of the deal, it’s the art of the bad deal.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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