A Roadmap for the Great U.S.-China Divorce

Washington needs allies if it really wants to decouple.

By Christopher Balding

As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? 

A fundamental objective for both is to become less reliant on the other. 

The trade war should thus be reframed as a conscious uncoupling.
Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. 

China is increasingly seen as a national security threat that fails to play by the rules. 

The Trump administration’s stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization. 

Democrats may dislike Trump’s methods, but few will disagree with his view of China as a mortal rival.
For its part, the government of Xi Jinping is concerned about China’s dependence on U.S. technology and finished manufactured products. 

The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies.
So how will they decouple? 

There’s little historical precedent to consider how this might look. 

Two major powers have never been so closely intertwined. 

However, there are some patterns emerging. 

First, alliances are slowly evolving into more cohesive forms. 

Just as the new U.S.-Mexico agreement (likely to include Canada) seeks to divert more trade into Nafta, other countries have started reconsidering their reliance on Chinese telecom-equipment makers for the rollout of 5G wireless networks.
Second, there’s a reassessment of where key products should be made. 

The second batch of Trump’s tariffs focuses on low-end intermediate exports with the intention of reducing China’s role in the global value chain and pushing reshoring to the U.S. and other locations, as a recent Natixis report noted.
Though it’s unlikely that Apple Inc. will start making iPhones in the U.S., shifting factories to allies is probable and builds upon existing trends. 

China is no longer a low-cost producer, and both foreign and locally owned firms there are actively considering plans to relocate operations. 

As Samsung Electronics Co. has shown in Vietnam, it isn’t necessary to make a final product in a country that manufactures the specific inputs. 

Chinese exports are dominated by electronics and basic machinery that rely on global supply chains, so it’s certain many companies are reevaluating their long-term sourcing plans.
If the Trump administration is intent on shifting supply chains away from what it considers a strategic adversary, it should accelerate plans to encourage this trend. 

Trade agreements that grant allied countries special access to U.S. markets with higher-quality governance and legal systems will increase the appeal for firms of moving out of China. 

That could mean revisiting the Trans-Pacific Partnership.
Washington must also actively open its domestic markets to Africa, Latin America and emerging Asian economies in lower-skilled products, where China dominates. 

The primary competitor for Chinese export market share isn’t North Carolina but Mexico, Vietnam and South Africa. 

For an administration seeking to reduce its dependence on Chinese garment and textile exports, raising tariffs on Rwandan garment exports is self-defeating.
The U.S. and China have talked officially of resolution, but realistically, the red lines laid out by both sides make a negotiated settlement difficult to envision. 

The Trump administration requires much broader market access and more changes to China’s socialist model than Beijing is willing to grant. 

The U.S. government, with bipartisan support, is likely to pass an updated foreign investment oversight bill that targets China in all but name.
If Washington really wants to reduce its dependence, it needs better planning to trade with allied countries and must allow other emerging-market economies to benefit from its tariffs on China. 

Garment manufacturing won’t be moving from Guangdong to Georgia, but many other countries would love that business. 

Such a shift would be a strategic win in a trade war that so far has shown little planning.

A Wolf In Sheep's Clothing

China WTO membership was a terrible mistake 
By Shawn Donnan in Washington

Robert Lighthizer: "The global trading system is threatened by major economies who do not intend to open their markets to trade and participate fairly".

The Trump administration has said that allowing China to join the World Trade Organization was a mistake and accused Beijing of moving further away from becoming a market economy.
 The statement in a report by the office of Robert Lighthizer, the US trade representative, is a sign of rising trade tensions between the world’s two largest economies. 
 It is also a reversal of more than two decades of policy in Washington towards China’s 2001 accession to the WTO.
Both Democratic and Republican policymakers have long argued that China’s membership of the organisation has been a way to bring Beijing into the global fold and avoid potential trade wars.
 Mr Lighthizer said China, together with Russia, was undermining the WTO, which had always been envisioned as a club for market economies eager to trade with others. 
 “The global trading system is threatened by major economies who do not intend to open their markets to trade and participate fairly,” he said, calling China’s actions “contrary to the fundamental principles of the WTO”. 
 His office’s first annual report to Congress on China’s behaviour as a WTO member described US backing for the Asian power’s accession as a mistake because of the terms that were agreed to and how Beijing had repeatedly failed to live up to promises to previous administrations.
 “Given these facts, it seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime,” the report said. 
 Mr Lighthizer vowed to use new unilateral tools outside the WTO to try to force a change in Beijing’s behaviour.
That foreshadows moves in the weeks to come that some analysts say could set up tit-for-tat trade actions by Beijing and Washington that could devolve into a big trade war. 
 A senior administration official said on Friday that while the US was prepared to continue using the WTO to fight its battles with China, it was also increasingly convinced that many of those actions were futile and that Washington was better served acting unilaterally in certain cases. 
 President Donald Trump’s administration is considering a number of actions aimed at China with much of the focus on an investigation launched last year into Beijing’s practice of forcing foreign firms to hand over important technologies in order to do business.  
Mr Trump has said he will discuss his trade plans and how to deal with China in his State of the Union address at the end of this month.
 A senior White House official said addressing “systemic” issues in China such as its industrial policy and intellectual property regime that were hurting the US economy was set to be one of the main themes of the administration’s work this year.
 The Trump administration, the White House official said, was also eager to force reform at a WTO that it sees as dysfunctional.  
 Edward Alden, a senior fellow at the Council on Foreign Relations, said the move to call US backing for China’s WTO accession a mistake amounted to an “extraordinary statement” that was “at odds with the convictions of senior US officials of both parties over at least two decades”. 

Trump’s not so great deal with China

By Peter Morici

Trump’s recent summit with Xi Jinping was only modestly successful. 

The hard reality is that on both security and economic issues, the United States and China are rivals — not partners — and much tougher days lie ahead.
Trump and Xi reached no substantive agreement to curb North Korea’s nuclear program and on trade, the two leaders initiated a 100-day review process whose ultimate objective is unclear.
For several decades, China accomplished double-digit growth by exporting consumer goods to western markets while keeping its economy tightly controlled. 

It imposes high tariffs and administrative barriers to imports, compels western companies to manufacture in China and transfer technology in order to access its markets, aggressively subsidizes domestic firms, and dumps products abroad in industries plagued by excess capacity.
The United States absorbed the brunt of this onslaught. 

The $310 billion U.S. trade deficit with China has shuttered factories, left millions discouraged and permanently unemployed, and imposes slower growth and huge foreign debt.
Manufacturing has been hardest hit and that curtails U.S. investments in new technology — both on the factory floor and in next-generation products such as industrial robots. 

Without addressing the bilateral trade deficit, Trump cannot deliver 3 percent to 4 percent growth.
As rising wages challenge manufacturers in Chinese coastal cities, the Communist Party must demonstrate it can still deliver significant growth. 

Beijing is becoming more, not less, protectionist and is targeting high-technology activities that strike at the heart of American prosperity, subsidizing startups and buying western businesses. 

It is tightening its authoritarian grip through control of the Internet and a social credit rating system that monitors personal activities to allocate access to jobs, housing and the like.
Those tactics violate World Trade Organization rules and western democratic norms, but Beijing has no desire to conform to western expectations of a communist state transitioning into an open, pluralistic society. 

Rather, it offers state-directed capitalism and authoritarian governance to developing nations as a superior model to what the United States and European democracies offer.
As menacing, China is using wealth amassed from huge trade surpluses to substantially build up naval and air power, assert sovereignty over neutral waters in the South China Sea, and project soft power in the Pacific and elsewhere through its Asian Infrastructure Investment Bank and other projects.
Obama did not heed U.S. defense leaders’ advice to more forcefully challenge China’s militarization of the South China Sea and North Korea, and Chinese muscle and money have encouraged key U.S. allies, the Philippines and Malaysia, to shift their favor toward Beijing.
Trump faces the unenviable task of persuading Beijing to constrain Pyongyang’s nuclear ambitions while pushing back on its illegitimate claims in the South China Sea and redressing the bilateral trade deficit.
By failing to cooperate on North Korea, Beijing has skillfully diverted American attention from the latter challenges. 

The Mar-a-Largo discussions did little to substantively address China’s provocations in the Pacific and for several decades, Beijing has tied up American presidents in endless economic dialogues and dead-end negotiations.
The 100-day process initiated in Mar-a-Largo sounds like a rehash of the Strategic and Economic Dialogue, which accomplished little during the Obama years.
Addressing China’s challenges will require Americans to rebuild the military — either though higher taxes or reduced government spending on other priorities — as Trump’s budget recommends.
On trade, either the United States obtains from China a blueprint with enforceable benchmarks to reduce and ultimately eliminate the trade deficit or the United States should impose such an arrangement unilaterally.
Abruptly imposing a 45 percent tariff would unnecessarily disrupt both the Chinese and U.S. economies. 

However, initially applying a 10 percent levy — or equivalent tax on the conversion of dollars into yuan, which would also impact on investment into China — and then increasing it by 10 percent every six months would go a long way toward persuading Beijing to curtail its mercantilist practices. 

At the very least, it would adequately insulate the U.S. economy while American businesses adjust to scaled-back bilateral commerce.
Those are tough measures — and Americans would likely pay more for toasters and T-shirts at Wal-Mart — but the benefits of putting millions of Americans back to work and restoring growth would far outweigh those costs.