By Clay Chandler
May 12, 2018

 

China’s top economic adviser Liu He lands in Washington on Tuesday for another round of trade negotiations with counterparts in the Trump administration. His mission: to find an eleventh-hour compromise that will dissuade Trump from imposing sanctions on Chinese imports, avert retaliation in kind from Beijing, and thereby save the world’s two largest economies from stumbling into a senseless and mutually destructive trade war. (And you thought your job was tough!)

But as Washington awaits Liu’s arrival, it’s worth wondering whether compromise is really the point of the exercise. On Wall Street, the prevailing view remains that Trump’s hard line on China is just a negotiating tactic. To hear optimists tell it, the sweeping list of demands presented by the U.S. trade delegation that visited Beijing last week was vintage Trump—a deliberately outrageous opening position crafted in hopes of eventually closing a better deal.

But what if neither side really wants a deal? In recent days, a small but growing chorus of cynics has suggested that, while a trade war might be economically ruinous for producers and consumers in both nations, leaders from the two countries might find protracted conflict politically advantageous.

Proponents of this view mostly have heaped blame on Trump. In a scathing essay in the Financial Times a few days ago, columnist Martin Wolf blasted the U.S. “draft framework” for trade talks as an absurd ultimatum, to which China could not possibly accede. “The idea that the US will be judge, jury and executioner, while China will be deprived of the rights to retaliate or seek recourse to the WTO is crazy,” Wolf declared. “No great sovereign power could accept such a humiliation. For China, it would be a modern version of the ‘unequal treaties’ of the 19th century.” While China might suffer more than the U.S. in an all-out trade war, Wolf argued, for China’s leaders, the economic costs of a trade war would be “dwarfed” by the political consequences of such abject surrender.

A Financial Times editorial took that argument even further: “If one sat down and made a determined effort, it would be hard to come up with a more economically wrong-headed, diplomatically toxic and legally destructive negotiating position than that presented to China last week by a visiting US trade delegation. Indeed, it is such an extreme set of demands that it is hard to avoid the conclusion that President Donald Trump’s administration, itching for a trade war, has produced an impossible agenda with the aim of goading Beijing into open hostilities….If the Trump administration simply wants an excuse that might play well back home to slap tariffs on Chinese goods, it has created one.”

But China has been equally unyielding. As Hoover Institution scholars Niall Ferguson and Xiang Xu point out—quite correctly—Chinese industrial policies that seemed relatively harmless when China joined the World Trade Organization back in 2001 have become enormously disruptive now that China has become the world’s second largest economy. “Beijing’s negotiators ought to abandon the pretense that the bilateral U.S.-China trade deficit has nothing to do with their country’s policies,” Ferguson and Xu contend. In 2001, China was “merely a big emerging market. Today it is approaching economic parity—and open strategic rivalry—with the U.S. The marriage must be adjusted to take this into account.”

Xi Jinping, despite frequent public references to “openness” and “shared prosperity,” hasn’t shown the slightest inclination to relinquish the state’s grip on China’s economy. To the contrary, he has stepped up support for state-owned enterprises, tightened restrictions on foreign firms operating in China, and doled out massive government subsidies for key sectors such as semi-conductors, robotics and artificial intelligence.

Ferguson and Xu calculate that a trade war would curb China’s GDP growth by a modest 0.3% a year, while the U.S. would be even less vulnerable. I’m reminded of the old the ad campaign for Tareyton cigarettes (back in the days when tobacco companies could advertise openly) that celebrated stubbornly loyal smokers by depicting them with big black eyes happily puffing away. The campaign’s motto: “I’d rather fight than switch!” Perhaps leaders in Beijing and Washington have come to exactly that conclusion.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

SPONSORED FINANCIAL CONTENT

You May Like