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Will Xi Offer Trump A Small Victory On Trade As Cover For His Longer-Term Ambitions

On Monday, Trump pressed Japan’s Prime Minister and business leaders to reduce the $69 billion trade deficit. A couple of badly made jokes, awkward moments and an unfair singling out of the auto industry later, we expressed our scepticism that the Japanese would do anything after he left (see “Trump Says Trade With Japan Is Not Fair And Not Open – Awkward Moments Ensue” here).  Today Trump touched down in Beijing for two days of meetings, including eagerly awaited talks with China’s greatest leader since Mao, Xi Jinping. The schedule includes a visit to the Forbidden City and a state dinner. During the press conference in Tokyo on Monday, Trump assured reporters that he has an “excellent” relationship with Xi (they all are), while expressing his determination to reduce the $327 billion trade deficit with the Middle Kingdom. Vowing to take “very, very strong action”, Trump stated.

“It has to come down…And that has to do really with free trade, fair trade, or reciprocal trade. And frankly I like reciprocal the best of the group.”

 

As the moment of truth approaches, the rhetoric on the Chinese side suggests that progress is a possibility. As Bloomberg notes.

When Donald Trump lands in Beijing...intent on tacling one of his biggest irritations - the trade deficit - he could get help from an unlikely source: his hosts. In contrast to Japan, China is raising expectations that there is a way forward. Its ambassador told reporters in Washington late last month to expect “significant outcomes.”

 

Xi told a group of U.S. executives in Beijing - including Apple Inc. Chief Executive Officer Tim Cook and Facebook Inc. founder Mark Zuckerberg - that he was looking forward to Trump’s visit and that his nation is embarking on reform with "unprecedented determination and vigor." This is encouraging after the US Commerce Department angered China last month by labelling it a non-market economy with “fundamental distortions” due to the interventions of the state. This allows the US to charge higher, anti-dumping duties under WTO rules on Chinese products sold below fair market value. Even more encouraging, China has detailed the actions it will take to reduce the $327 billion trade gap.

In response to questions from Bloomberg about how China will reduce the trade gap, Commerce Minister Zhong Shan replied with a list of measures. In summary, Zhong denies that China seeks to maintain a trade surplus and states that China will open its markets to increased imports using fiscal and other initiatives. One initiative is the launch of the China International Import expo (CIIE) on 5-10 November 2018.

Below is the section “How will China address the trade surplus with its partners?” from Zhong’s reply (see here for the full text).

In recent years, China has sped up the implementation of active and effective import policies and introduced a number of policy documents to boost imports. It has effectively adopted a host of substantial measures to expand imports with fiscal and taxation policies, finance, streamlined management and an enhanced level of liberalization.

Such measures will be continued as follows: First, gradually reducing import tariffs. The general tariff level of China has decreased from 15.3 percent before its WTO accession to 9.8 percent at present, much lower than the average tariff of 46.6 percent for developing countries. China has signed 15 free trade agreements, covering 23 countries and regions. More than 90 percent of product varieties enjoy zero tariff, involving over one-fourth of China’s total imports and exports.

Second, improving fiscal, taxation and financial policies to expand imports. We will reduce tariffs on some daily consumer goods and import more consumer goods to optimize the import structure. We will also adjust the Catalog of Technologies and Products Encouraged for Import and encourage banking institutions to offer more support in import credit to expand the import of advanced technologies, equipment and key components.

Third, balancing supply and demand and promoting trade facilitation. We will step up customs clearance integration and improve inspection and quarantine systems to increase the level of trade facilitation.

Fourth, reforming and optimizing the management of imports. We will streamline administration, delegate power, strengthen regulations and innovate administration models to better manage and serve imports.

Fifth, improving the import promotion system. We will come up with new import models and advance parallel import of automobiles.

US and European leaders have become more and more frustrated with the glacial pace at which China has been opening up its markets. In “Trump and Xi Joust For World Economy Crown” here, Bloomberg believes that “progress” will likely benefit US investment banks more than the US manufacturing sector which Trump championed in his China rhetoric before the election.

Trump, who’ll be accompanied by business leaders eager for deals…That gels with his campaign pledges to return manufacturing jobs to the U.S., including reviving industries like coal mining and steelmaking. “Xi’s model is to build an economy that looks more like America’s, and Trump’s is to build an American economy that looks more like China’s has been,” said Hugh White, a professor of strategic studies at the Australian National University in Canberra and a former intelligence analyst and senior defense official. “Xi’s increasingly focused on China’s economy expanding into high-tech and high value-added jobs and letting other people mine the coal and make the steel. Trump’s model of course is just the opposite.”

So far, the Trump presidency has been a positive for China’s economy as low U.S. unemployment and slow-to-no progress on tariffs has supported a return to growth for China’s exports, while a weak dollar for the first three quarters of the year was a boon for the yuan, said Bloomberg Intelligence Chief Asia Economist Tom Orlik. "In an optimistic scenario, Trump’s appetite for tweetable wins and China’s longer-term focus could coalesce around financial market opening -- a boon for the U.S. investment banks, and a support for China as it attempts to tame its credit boom," Orlik said.

Orlik might have a point, but our suspicion is that Xi’s plan is to offer a “victory” to Trump with regard to reducing the trade gap, but only a small one.

Meanwhile, China will continue with its longer-term “Mackinder-esque” plan to integrate the Eurasian continent via its “One Belt, One Road Plan” and undermine the dollar by accumulating gold and steadily increasing non-dollar trade. If it wasn’t for the small matter of China’s horrendous credit bubble, the US would have an even weaker hand.