Can China Make Its Trade Surplus with the U.S. Disappear?

January 19, 2019, 2:52 PM UTC

Bloomberg reported Friday that Chinese trade negotiators have put forth a proposal to Trump administration counterparts that would eliminate China’s trade surplus with the United States by 2024.

The report, if accurate, suggests an astonishing breakthrough in trade talks between the two countries. In 2018, China’s trade surplus with the U.S. topped $323 billion, a 17% jump from the previous year. Global markets rallied in response to the prospect that the world’s two largest economies were closing in on a trade truce.

I’ve argued previously in this space that reducing China’s trade surplus with the U.S. to zero is mathematically improbable, if not impossible—at least in the short term. That’s so even if China were to dramatically ramp up purchases of big-ticket U.S. imports such as Boeing jets, soy beans, and natural gas.

The math is less daunting over a six-year horizon. But the Bloomberg report says Trump insists he’ll refrain from slapping even higher tariffs on U.S. imports from China only if Beijing promises to eliminate the trade surplus within two years.

Trump’s fixation on the bilateral trade balance between the U.S. and China is silly for many reasons, which I won’t belabor here—except to note that it contradicts his other, more worthy trade goals. Trump has argued Beijing should stop meddling in China’s economy, abandon Xi Jinping’s “Made in China 2025” industrial policy for China’s tech sector, stop channeling cheap capital to unproductive state-owned enterprises, and give way to free markets and private firms. But his demands that China eliminate its bilateral trade surplus with the U.S. within two years will require forceful intervention in China’s economy by central government planners—strengthening the role of the state in China’s economy rather than allowing it to wither away.

Meanwhile, there’s been very little new information about what China would do to curb theft of U.S. technologies and eliminate requirements for U.S. companies to surrender proprietary technologies as the price of entry into the Chinese market.

Derek Scissors and Daniel Blumenthal, analysts at the conservative American Enterprise Institute, recently offered this proposal outlining what a rules-based U.S. trade policy focused on intellectual property protection rather than an outcomes-based policy focused on the bilateral U.S-China trade balance might look like. They argue that “comprehensive tariffs, which harm American consumers and workers unnecessarily, are not the right reaction.” U.S. government intervention in trade policy, they contend, “should be limited to areas that are genuinely vital to national security, prosperity and democratic values.”

More China news below.

Innovation and Tech

Tough week for Huawei. Huawei is reportedly under federal investigation in the U.S. for stealing trade secrets; Germany is contemplating banning the company from 5G projects; U.S. lawmakers introduced a bill to block the sale of core components to the company; and Oxford University suspended new research grants and donations from Huawei, warning students not to discuss “confidential or propriety information” with the company. Fun fact: Huawei’s new Dongguang campus has 12 zones, each modelled after a different European city. The ‘Oxford’ zone is still under development. Wall Street Journal

Take a byte. Bytedance, the $75 billion start-up behind short video app Tik Tok, launched a new service Tuesday called Duoshan, which lets users send texts, images and short videos. The content auto-deletes after 72 hours, similar to Snapchat, which is blocked in China. Bytedance said its new service is not a challenge to WeChat, China’s pre-eminent messaging platform, but WeChat has blocked users from sharing download links for Duoshan. South China Morning Post

Drive safe. The overseas unit of China’s largest online insurer, Zhong’an, has entered a partnership with Singapore’s Grab to offer insurance products to the ride-hailing platform’s customers and drivers. The service will be rolled out in Singapore during the first half of this year before expanding to other Southeast Asian nations. Nikkei Asia Review

Economy and Trade

Talk up the numbers. China wants to assuage fears that the economy is softening. The government arranged back-to-back press conferences this week with officials from six ministries all offering a positive spin on the economy. Earlier, economic ministers took to television to correct some “wrong perceptions” about the economy, but the data looks bad. Growth is expected to slow to 6.3% this year, the slowest in 29 years.  South China Morning Post

Mr. Liu goes to Washington. China’s Ministry of Commerce confirmed Vice Premier Liu He will visit Washington January 30 to hold trade talks with U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. Liu He, China’s ‘economic tsar’ made a surprise appearance at low-level trade talks held in Beijing last week. Analysts think the chances the two sides will reach a complete resolution are slim. Global Times

Spending spree. At the trade talks last week, China offered to ramp up imports of U.S. goods to eliminate the trade deficit, which stood at $323 billion last year, by 2024. The U.S. negotiators were reportedly skeptical of this plan, but pushed China to deliver trade parity within two years instead. Bloomberg

The other Bay Area. The government of Guangzhou, China’s southern metropolis, has pledged $2.8 billion to developing the Greater Bay Area (GBA) this year, 28% more than it spent on the scheme last year. The GBA is a plan to integrate cities around the Pearl River Delta, including Hong Kong, Shenzhen, Guangzhou and Macau, into a unified high-tech hub. Caixin

In Case You Missed It

Happy Honey Badger nightclub has Alibaba-themed cocktails and Jack Ma biographies for sale SCMP

China’s Looming Crisis: A Shrinking Population NYT

Argument: The Belt and Road Initiative is a corruption bonanza Foreign Policy

'Smartphone zombie' fine cheered on Chinese social media BBC

Surgeon performs world’s first remote operation using 5G The Independent

NASA and China collaborate on moon exploration Channel News Asia

Politics and Policy

China condemns a Canadian. China sentenced a Canadian citizen to death this week. The Canadian, Robert Schellenberg, was sentenced to 15 years for drug smuggling in November but the case was reopened in December, shortly after Huawei CFO Meng Wanzhou was arrested in Canada. Chinese officials brought foreign journalists to the court house to watch the retrial, where Schellenberg was condemned on Monday. Prime Minister Justin Trudeau accused China of applying the death sentence ‘arbitrarily.’ Reuters

What's in a name? The Chinese Academy of Social Sciences said that 66 Fortune 500 companies use ”incorrect labels” when referencing Taiwan and a further 53 firms also refer to Hong Kong ‘incorrectly.’ Last year China criticized international airlines for listing Taiwan as a separate entity from China on their websites, a criticism the White house labelled “Orwellian nonsense.” Fortune



This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.

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