Anyone reading the joint US-China Agreement issued at the conclusion of talks the third week in May in which the world’s two largest economies called a temporary truce to their increasingly volatile trade war could not help but come away thinking that the statement was beyond vague.
The so-called agreement showed nothing concrete was decided in any shape or form. For us veteran trade negotiators, frankly it was the biggest “nothing-burger” trade agreement issued in modern times. Back in Beijing, the Chinese side, which has a well-honed unified trade policy strategy, declared — accurately — victory.
In Washington, meanwhile, in-fighting among the US negotiating team was in full-view. Indeed, there is no coherent stance within Team Trump vis-a-vis US trade policy overall, and especially with respect to China. This could not have been better reflected by the fact that just after the release of the joint US-China proclamation, two materially different official statements interpreting the Beijing-Washington agreement were issued: one by the Secretary of the Treasury and the other by the US Trade Representative.
That was a truly striking first-time event for any administration.
Incredulously, the next day stock markets soared. Traders clearly don’t get it. The real story is twofold: Not only is China the trade warrior cat smacking around an already nibbled upon US mouse, but we have now firmly entered into in an era where international investment, export and import decisions made by US as well as other businesses will need to be navigated in the face of chronically mixed trade signals emanating out of Washington — the city that used to be the global bulwark for transparent, stable rules for foreign commerce.
Team Trump has a stunning knack for creating the most uncertainty in US international economic policy any of us can recall.
Two major factors are driving this result. The most visible is the Trump’s unending obsession with trade deficits. Any economist worth his or her own salt will tell you that trade deficits in and of themselves are close to economically meaningless.
Yes, trade imbalances — deficits or surpluses — that endure over very long periods of time may well reflect foundational aspects of an economy. But they are the symptoms, not the disease.
Trump is more than correct that the Chinese do not abide by fair, systematic, transparent and market-based rules for global trade. But the White House’s focus on the trade deficit is forcing the team to bark up the wrong tree. Their tit-for-tat approach — centred on applying higher and higher and more expansive tariffs to Chinese exports to the US — is not only piecemeal and self-defeating, it’s actually aimed at a largely irrelevant facet of the real and far deeper problem at hand.
In the case of China, tariffs will not create the disincentives needed to try to alter China’s behaviour. Put simply, even if the US had a trade surplus, tariffs won’t cure the core challenge of China’s conduct in international commerce.
The fact of the matter is that Beijing has not fully effectuated the changes in its domestic governing economic institutions — what we economists call “behind-the-border” reforms — it agreed with the world trading community it would institute upon it accession to the WTO in 2001. It is regrettable that by not having made sufficient progress in its WTO-committed reforms over the past 17 years — not just passing laws or promulgating regulations but actually implementing and enforcing them — China can’t credibly be treated as a “market economy” under WTO rules.
Beijing has put in place serious and substantial reforms since 1978. Indeed, the country’s method of reforming — based on incremental experimentation both to iron-out components that don’t achieve the intended outcomes and build public support for moving forward — is truly innovative. It’s a process from which the US can surely learn.
But as much progress as Beijing has made, China’s reforms simply still do not get at the heart of solving the contradictory challenges inherent in the oxymoron “socialist market economy” framework that still guides the country almost 40 years on.
At its roots, China isn’t a market-based economy. It’s separation of business and government remains ephemeral; private property rights are still fuzzy, and rarely protected; identification of the beneficial owner(s) and who has ultimate control over decisions within some of the country’s key enterprises is opaque. The large state-owned banks hold little check, if any, over the large backbone state-owned enterprises to whom they lend and often never pay off debts owed.
Communist Party officials occupy some of the most senior positions in the enterprise and financial sectors, including most recently naming the country’s top banking regulator as the party chief and deputy governor of the Central Bank; and foreign investors must transfer technology to Chinese firms if they wish to invest in the country.
At the same time, Trump’s insistence on handling China in a US go-it-alone manner is just plain wrong-headed. We know from his many statements that anything but negotiating on a bilateral basis is anathema to him — a man whose career was built on doing one-off real estate deals in New York. But international trade negotiations are far more nuanced and complex.
Rather than using the “power of collective action” and building a coalition of other major trading powers — many of whom like the US have been exposed to China conducting trade inconsistent with prevailing international norms — Trump’s efforts will have him falling flat on his face.
What’s needed is a fundamental alteration of the treatment of China within the WTO framework — that is, if the WTO is to have any further meaning and survive. It’s finally time to call a spade a spade.
And, it’s also high time for the US to change its trade tactics towards Beijing. It needs to form a coalition of WTO members who make it clear that it really is Beijing’s choice to decide the type of economy it believes China’s population wants.
But that as of now, China has forfeited its right to be treated as a WTO market economy and it has three options: renegotiate its WTO Accession; gracefully exit the WTO; or diplomatically be shown the WTO door.
The writer is CEO and Managing Partner of Proa Global Partners LLC and a faculty member at Johns Hopkins University.