We’ve Endured Years of Bragging From Trump—What Would an American Trade ‘Victory’ Look Like?

By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

Beijing and Washington have been engaged in long-standing negotiations to resolve an increasingly contentious trade dispute. It looks like we are approaching the endgame, but, as James Politi and Lucy Hornby report in the Financial Times, “the two sides remain apart on two key issues—the fate of existing US levies on Chinese goods, which Beijing wants to see removed, and the terms of an enforcement mechanism demanded by Washington to ensure that China abides by the deal.”

Assuming we resolve these final issues, what will the ultimate deal look like? Will it rectify lingering structural problems that have devastated U.S. manufacturing (with genuine enforcement provisions)? Or will the deal simply represent yet another faux bargain in which China essentially bribes U.S. officialdom via purchases of some additional soybeans and wide-bodied aircraft to make cosmetic reductions in Beijing’s bilateral trade surplus?

There’s no question that a simple restoration of the status quo ante would not constitute a trade win for the president by any stretch. That would be an epitomic case of “sound and fury, signifying nothing.” At the same time, it would be highly unrealistic to expect Beijing to eliminate its elaborate system of state subsidies for industry, the basis for its state capitalist growth model, which has accelerated China’s quantum leap up the technology curve.

In this regard, the president’s current trade representative, Robert Lighthizer, will play a crucial role in determining the outcome, although questions still linger as to whether he will ultimately be undermined by Trump in the latter’s quest to secure a win at any cost, especially if this ‘win’ comes with the usual pledges to purchase much higher quantities of American goods and nothing else behind it. By the same token, even if Beijing goes beyond that and pledges to open up more sectors of China’s domestic economy to U.S. investment, tighten laws on intellectual property, etc., such additional promises do not really help American workers (quite the contrary, if it means that companies like GM keep shutting down domestic facilities and making increasingly large bets on the Chinese market, as they appear to be doing already). Using Trump’s simplistic metric of success—the actual bilateral trade figures between the United States and China—investing more in China will not reduce America’s trade deficit with Beijing and, indeed, might add to it, as these Chinese-manufactured goods are re-exported back to the American market.

The granting of a “permanent normal trading relationship” (PNTR) and then the subsequent accession to the World Trade Organization (WTO) in 2001 have been a boon for China, but the persistence of ongoing American trade deficits have led many, including the current president,to judge the United States a loser in ongoing trade negotiations with Beijing. It’s not a totally irrational judgment: China’s WTO accession hasn’t been great for U.S. manufacturers.

Part of the problem stems from the extraordinary fact that Washington has seldom deployed a negotiator who is actually well-versed in trade issues. Since the days of the Clinton administration, it has been the U.S. Treasury Secretary, as opposed to the country’s chief trade representative, who has consistently directed trade negotiations, with the resultant (and eminently predictable) impact that financial interests have superseded those of any other economic sector. That pattern was briefly disrupted when President George W. Bush appointed Alcoa’s CEO, Paul O’Neill, to head the Treasury, and then CSX president John W. Snow, but ultimately the “Wall Street uber alles” mentality again prevailed with the appointment of Hank Paulson (to be followed by Tim Geithner, Jack Lew, and now Steve Mnuchin—all of whom have finance-centric backgrounds).

For all of the supposed financial sophistication of America’s Wall Street-based Treasury Secretaries, it is indeed ironic that China has consistently been able to play them for fools with the implied threat of its so-called “nuclear option,” a highly flawed narrativethat alleges that as a final resort, Beijing would dump its huge stockpile of U.S. Treasuries, thereby driving up U.S. rates, and creating a catastrophic depression for the U.S. economy. That so-called threat to the bond market is the traditional reason why successive Treasury Secretaries have been hesitant to resort to the blunt trauma force of trade sanctions or tariffs when it came to negotiating with Beijing. They were also comforted by the idea that as it modernized, China would increasingly abide by traditional norms of free trade doctrine against all available evidence that shows that it has not played by the same rules.

Let’s leave aside the internal incoherence of the nuclear option: China exiting dollar-denominated assets could well create downward pressure on the external value of the free-floating currency. But that would enhance U.S. export competitiveness, assuming, of course, that America has anything left to export, an unfortunate legacy of the Treasury’s malign neglect of U.S. manufacturing. It’s also operationally wrong (see herefor further detail), and mistakenly assumes (against all historical evidence to the contrary) that Beijing would pursue an economic policy that is the functional equivalent of cutting its own nose to spite its face, as Paul Krugman, among others, notes.

Even if Paulson, Geithner, Lew, Mnuchin, etc., didn’t truly believe in the “nuclear option,” they have been happy to tamp down the possibility of a trade war in order to keep the capital markets stable. Each trade “deal” has therefore largely sustained the status quo, the price for which sees Beijing usually offering up a few well-timed purchases of soybeans or Boeing aircraft (although the latter will be more problematic in light of the 737 fiasco). But China’s policy makers have never been forced to deal with the economic consequences of their country’s mercantilism, which has resulted in the steady erosion of America’s Rust Belt, as the U.S. economy gave back the considerable employment gains it achieved during the 1990s, via a historic contraction in manufacturing employment.

Things have changed markedly since Trump seized the “China trade” portfolio from the Treasury’s Steve Mnuchin, and placed it under the control of Robert Lighthizer, the current trade representative. Unusually for a member of the Trump administration, Lighthizer actually knows his brief. He has had literally decades of experience in trade issues, dating from his days as a deputy U.S. trade representative in 1983 (when Japan was widely perceived as the main trade threat), to his current role as America’s chief trade negotiator. As Trump’s U.S. Trade Representative (USTR), he has provided policy flesh and bones to the president’s robustly unilateral approach in trade.

If anything, Lighthizer’s trade hawkishness has become even more pronounced over the years, as he has shifted his attention away from Japan to China. In his 2010 congressional testimony, he argued that U.S. policy makers gravely underestimated the threat posed to American manufacturing by virtue of China’s entry into the WTO, marshaling an array of evidence to cast doubt on the idea that its entry had brought any significant economic benefits to U.S. workers and businesses. He also highlighted the mercantilist nature of Beijing’s state capitalism and noted that the country’s administrative complexity likely precluded it embracing WTO rules, even if wanted to do so (which he doubted):

“As part of China’s system, specific large companies receive government patronage in the form of credit, contracts, and subsidies. The Chinese government, in turn, sees these ‘national champions’ as a means of competing with foreign rivals and encourages their dominant role in the domestic economy and in export markets…

{[S]cholars have questioned whether—given its lack of institutional capacity and the complexity of its constitutional, administrative, and legal system—China is even capable of complying with its WTO obligations.

No doubt in thrall to the prevailing free-trade ideology, Washington’s “policy passivity” made it loath to use available tools such as the WTO’s “421” special safeguardsto counter the resultant trade shock. In that same testimony, Lighthizer also signaled that he was uninterested in the niceties of WTO style multilateralism, more inclined to the use of “aggressive unilateralism” via executive orders, diplomatic pressure, and most importantly, the use of Section 232of the 1962 Trade Expansion Act to levy tariffs on various products, premised on the notion that the targeted country (in today’s case, China) represented a national security threat.

Most significant from the Lighthizer perspective is an explicit rejection of the idea that China needs to do more than just buy more U.S. goods before the two countries strike a permanent trade deal, which in any case is highly problematic if the end objective is to bring the bilateral trade balance between the two countries to zero.

You can understand why. For one thing, the math doesn’t add up: even if China were to raise its agricultural purchases by $30 billion, as it has reportedly pledged to do, this is pretty small beer in the context of a $300 billion bilateral trade deficit. As the economist Brad Setser highlights:

“The scope for explosive growth in soybeans is actually fairly limited, as the pre-tariff base for soybeans [the number one or two largest U.S. export to China] was quite high—the United States was supplying $12 billion of China’s almost $40 billion in oil seed imports. A huge tilt away from Brazil might cause U.S. beans exports to double, but getting much more than that would be difficult (there is a natural seasonality to soybean trade that favors alternating supply from the Southern and Northern Hemispheres).

“The real growth would need to come in sectors where China doesn’t buy much now. Corn. Rice. Perhaps pork and beef… Getting really big numbers there though would risk pushing up U.S. prices, and getting China to abandon its goal of self-sufficiency in basic grains.”

So U.S. farm prices would be pushed up, which would hurt U.S. domestic consumers, even as it cosmetically dresses up America’s trade position vis a vis China.

Setser adds:

“China has signaled it is willing to let foreign firms take majority stakes in a few more sectors, and has reiterated its belief that technology transfer isn’t a legal requirement for entry into the Chinese market. There are likely to be settlements on some long-standing disputes as well—the rating agencies have gotten approval to enter the Chinese market; Visa, American Express and Mastercard likely will finallyget approval too (Mastercard through a joint venture… not everything changes); and some tariffs introduced as retaliation in the past may get dropped.”

But how does the entry into China of consumer credit card companies or the ratings agencies help Americans? Ironically, this looks precisely like the kind of sop to finance that Trump said he would eschew. However, because of corporate/Wall Street pressure, the Trump agenda pivoted a few months ago from selective decoupling and protection of American strategic industries to opening up China for U.S. investment and pushing China to treat American companies doing business in China more equally. That is why leading U.S. companies have become friendlier and increasingly less critical of the president’s trade policy, even as the economic commentariat has continued to blast him.

Trump himself needs to understand that a third to a half of ‘trade’ is really transnational production with inputs from suppliers coordinated by mostly third-party manufacturers in Asia (notably in semiconductors). The purpose of modern mercantilism (particularly as it is practiced in China today) is not just to sell more finished goods but to try to monopolize the high value added rungs of supply chains. It is unclear that targeting China’s bilateral trade surplus with the United States will ultimately disrupt these entrenched supply chains. It almost certainly won’t bring semiconductor manufacturing back to America’s shores.

In the end, therefore, pushing China’s leadership to make structural changes to open up China to American companies is probably an illusion. Beijing is unlikely to rip up the model that has seen it create national champions that can now compete successfully with America’s biggest corporations. It may make token promises to curtail cybertheft, or the subsidies that the administration complains create an uneven playing field for American companies. But, as noted above, even Lighthizer himself has cast doubt that Beijing could enforce those promises, given the administrative complexity of its system of governance. In his eagerness to claim a win, therefore, Trump ironically might end up settling for the usual Faustian bargain: more large Chinese purchases, selective decoupling of supply chains (as American companies rethink their reliance on China), and increased domestic protection for certain sectors (such as 5G) on national security grounds, Lighthizer’s considerable efforts notwithstanding. We may have reached the peak as far as this particular tariff war goes, but the longer-term trade tensions will almost certainly persist well beyond this hollow ‘victory,’ which Mr. “Art of the Deal” will no doubt claim for himself when the negotiations do officially end.

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  1. The Rev Kev

    Excellent assessment of the situation here. I suppose another factor for Trump is the fact that as the US 2020 elections drew ever nearer, he will want some sort of win – any sort of win – to take to the American people to show that he was tough on China and got a better deal. His opponents will disagree with the deal. Hell, probably most economists will disagree but Trump will only care what his supporters think as they are the ones that will re-elect him.
    But of course the interests of people like Robert Lighthizer may come into play here as he may not care what Trump wants. He is the sort of person that might just blow up negotiations in order to be tough on China to get it to buckle. I have seen this movie before. Let me quote from a Salon article here-

    “In the summer of 1941, before leaving for Placentia Bay, U.S. President Franklin D. Roosevelt had ordered a freeze on Japanese assets. That measure required the Japanese to seek and obtain licenses to export and pay for each shipment of goods from the United States, including oil. This move was most distressing to the Japanese because they were dependent on the United States for most of their crude oil and refined petroleum products. However, Roosevelt did not want to trigger a war with Japan. His intention was to keep the oil flowing by continuing to grant licenses. Roosevelt had a noose around Japan’s neck, but he chose not to tighten it. He was not ready to cut off its oil lifeline for fear that such a move would be regarded as tantamount to an act of war.
    That summer, while Roosevelt, his trusted adviser Harry Hopkins and U.S. Undersecretary of State Sumner Welles were attending the shipboard conference off Newfoundland and Secretary of State Cordell Hull was on vacation at the Greenbrier in West Virginia, the authority to grant licenses to export and pay for oil and other goods was in the hands of a three-person interagency committee. It was dominated by Assistant Secretary of State Dean Acheson, whom one historian described as the “quintessential opportunist of U.S. foreign policy in 1941.”
    Acheson favored a “bullet-proof freeze” on oil shipments to Japan, claiming it would not provoke war because “no rational Japanese could believe that an attack on us could result in anything but disaster for his country.” With breathtaking confidence in his own judgment, and ignoring the objections of others in the State Department, Acheson refused to grant licenses to Japan to pay for goods in dollars. That effectively ended Japan’s ability to ship oil and all other goods from the United States.
    Acheson’s actions cut off all American trade with Japan. When Roosevelt returned, he decided not to overturn the “state of affairs” initiated by Acheson, apparently because he feared he would otherwise be regarded as an appeaser. Once Roosevelt perpetuated Acheson’s trade embargo, the planners in Japan’s imperial military headquarters knew that oil to fuel their fleet, as well as rubber, rice and other vital reserves, would soon run out.”

    And we all know what happened next. So I would not be surprised if Robert Lighthizer could very well be the re-encarnation of Dean Acheson and given half a chance, would seek to put China under the gun if he thought that he would get away with it.

    1. Marshall Auerback

      Rev Kev
      I hope you are right. LIghthizer is actually one of the few beacons of hope in the Trump Administration. But I fear he’ll drink the Trump Kool-Aid and basically settle for less than half a loaf. That’s a fascinating historical precedent you have cited. Thank you for bringing it to my attention.

    2. Albert

      Very interesting article. In the mean time Japans aim was land conquest. They raped, murdered, and pillaged their neighbors so WWII USA/Japan was not avoidable to say the least. They worshipped an emperor and thought they were superior ideologically and militarily. One could argue that they should have addressed the Japan issue years earlier.
      Trump has taken on 20+ years of terrible trade deals and is now stepping up to change it. He should be applauded! Instead, everyone in the peanut gallery (news media) takes pot shots at him. We are dealing with a “COMMUNIST” country here which says it all. We now have a business man running the USA thank God. To make changes will take time!

  2. Sound of the Suburbs

    The US dreamed of an open, globalised world.

    China became a superpower and the US went into decline.


    What do we do now?

  3. Sound of the Suburbs

    Why not just blow your economy up like the US and UK in 2008?

    They have seen their Minsky Moment coming unlike the clueless Americans and British.

    The PBoC know where to look to see these things unlike the FED and BoE.

    The private debt-to-GDP ratio.



    The West’s “black swan” is a Chinese Minsky Moment.

  4. John B

    Darn. When I read the headline, I hoped the article would explain what a victory in U.S. trade policy with China would look like — that is, what kind of trade relationship would “rectify lingering structural problems that have devastated U.S. manufacturing (with genuine enforcement provisions).” That’s a tough question to answer! But all this article describes is why Trump’s policy won’t achieve that result. Every policy tried so far has not achieved that result, so it’s not really surprising that this one won’t either. In fact, the article seems to suggest that China cannot play by reasonable trade rules. So what is victory? Seriously, we need an answer to that one.

    1. Monty

      How can State Capitalism have caused that ‘quantum leap’ for China when everyone told us Central Planning does not work?

      If it does work, maybe the US should try it in a way other than the PPT, Fed bailouts, ag subsidies, military industrial complex, mortgage subsidies, sanctions on rivals, military action on rivals, etc they already do.

    2. JEHR

      As I understand it, US manufacturing left the US for other countries because of the lower cost of labour and the lower cost of doing business in foreign countries. What would bring manufacturing back from foreign countries? Maybe when the cost of doing business in the US (i.e., wages and salaries of the working class) are lower than those in foreign countries. Maybe a labour contigent made up entirely of robots would bring back manufacturing to the US.

      1. d

        While lower wage costs helped drive it, now they the ever rising cost of shipping their wares. Course they have seen the Chinese boycotts work so well, they may think they will have a US version to deal with, as so many dislike ok, hate globalization, that any that smacks of it has a PR problem. Course its likely we will see a repeat of NKoroea too

        1. d

          While labor cost was a driver, it didn’t go down cause executive labor cost went up.plus there was a lot more travel costs too

          1. Irrational

            different budget line probably, so can still be presented as cost-saving… also factor in the use of consultants before/during/after off-shoring – but again different budget line!

  5. jonst

    I’m not sure at all what others think a “victory’ would look like, but to me it would be anything that finally raises the profile our (Western Nations) reliance (addiction?) on supply chains emanating from CHina that impact, negatively, our National Security. If we could even BEGIN to discuss this dilema I’d be satisfied. And it appears we are beginning to question the dependence.

  6. rc

    China has been at war with the United States for decades. It is an all domain, unrestricted war. The Chinese do not play by any rules but their own. They have used the West’s strengths of an open political and market system against North American and European industrialized democracies.

    A win against China means re-industrializing the United States across all manufacturing industries. Tariffs and regulations are the most efficient means to effect this result.

    Negotiating is a fool’s errand. China will not live up to its obligations under the agreement anyway.

    Perhaps, readers should ask themselves if China is beginning to resemble the Third Reich. Dictatorship, concentration camps, military buildup, territorial expansion, religious persecution, military aggression, economic warfare, racist ideology… If so, then we should determine what steps the West and its allies in the East should take to ensure its survival and prosperity.

    1. John k

      Probably we need tariffs to protect against the wage race to the bottom. Not at all clear trumps 25% threat is high enough.
      But spending big on overdue infra would employ lots of blue collars, some at union wages not in competition w foreign labor, and focusing on higher unemployment regions first avoids inflation.
      Regarding changes in Chinese gov… us has been warmonger for decades, assassinates foreign leaders etc… China so far not nearly as aggressive.

  7. Susan the other`

    Our corporations which benefit from unlimited credit via our very own Military Industrial Capitalism are no different from China’s SOEs. China is protecting essential industries, so are we. We have tried to force austerity on the rest of our economy – but China does not. Why is that? And because we have succeeded in establishing the world’s most unequal society, we should be proud of our success. Mindless and shameful as it has been. China doesn’t think it would be politically beneficial to do that to 1.5 billion Chinese. They will find their own way. Why should they now shoot themselves in the foot just because we did? For them to bend to our demand that they stop being so mercantilist means they would have to impose austerity on their people to some degree. It’s an appropriate point for a showdown. And I can’t imagine we will win unless we are willing to continue our own ridiculous social “structure” which is undemocratic and tyrannical. We’re looking at a political revolution because everyone is fed up. China is not. Who’s right? We can only brag that we have the “liberal” high ground because we haven’t faced facts yet.

  8. ptb

    The latest Iran sanctions salvo, the claim that “waivers” for China and others will be eliminated, is another complication. It will be perceived, with good reason, as deliberately interfering with world trade under false pretenses. An aggressive follow-up and this could be an effective way for team Trump to get out of whatever agreements they made in negotiations so far. More drama…

  9. Lynne

    The potential increases in pork shipped to China mentioned will not mean much. China owns a huge US pork producer.

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