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18 December 2018

Is The Trump Administration Willing To Make A Deal With China?

by Simon Lester

Originally published by CATO.

The escalating tariffs imposed by the United States and China in recent months are making people and markets nervous, and just about everyone would like to see a deal of some sort. Over this period, prospects for a deal have gone up and down with the latest Trump tweet, but some reports suggest that the prospects now look promising. The current negotiating timetable is based on a 90-day period that Presidents Trump and Xi agreed to at their dinner in Buenos Aires on December 1 during the G20 talks. But what exactly would a deal look like? The Trump administration talks a lot about what it wants China to do, and the media mostly focuses on that. But what, if anything, will the administration give as part of this deal? Mike Santoli of CNBC Closing Bell asked White House trade adviser Peter Navarro this question recently:

MIKE SANTOLI: Peter, you started out by saying how President Xi in 45 minutes gave a presentation showing a willingness to address all the United States’ concerns and then you say but everything else they have done essentially means that you’re very skeptical, I assume, of the likelihood of them delivering that. In exchange for what was the President suggesting that they would perhaps promise these reforms? In exchange for what from the United States?

PETER NAVARRO: …In terms of what we give back, I mean therein lies the rub. President Trump has been eloquent in stating that we are the piggy bank of the world. We’re in all these sorts of one sided bad trade deals and the problem that we have whenever we negotiate with whoever we negotiate is they are getting such a great deal they really don’t want to give us anything. So we are not prepared to give them anything in terms of a deal quid pro quo because we are so much behind the eight ball. We are not stealing their technology. We are not forcing the technology transfer. We are not manipulating our currency. We are not counterfeiting and pirating Chinese goods and flooding their markets. We are not having state owned enterprises run rampant around the world, basically exploiting the rest of the world. So what is there for us to give? What we have to give is access to our markets, period. The largest market in the world. Access to our financial markets, our capital markets. This is a great gift that we give to other nations. But we’re not going to do it anymore – President Trump’s made it clear – we’re not just going to give that away and be exploited.

In short, Navarro says that the administration will not be giving anything. Of course, even if he knew otherwise, he probably feels like he has to say this as part of the administration’s negotiating strategy. But regardless of what he or the administration says about this, the reality is likely to be different. Generally speaking, trade deals involve concessions by both sides. And with China in particular, given its “century long humiliation” of being pushed around by foreign powers, one-sided deals are going to be very difficult politically. And that seems to be how China is thinking about these negotiations, as a spokesperson for China’s Ministry of Commerce recently suggested: “In the next 90 days, China and the U.S. will negotiate on major issues of bilateral concern based on the principle of ‘mutual respect, equality, mutual benefit, and being mindful of each other’s concerns,’ aiming at the ultimate goal of removing all additional tariffs, and striving to reach consensus.”

So what might China want or expect to get out of a deal? In a Free Trade Bulletin we wrote last year, we suggested some possibilities:

… if this is to be a negotiation, China will have demands, too. One of these is likely to be that the United States begins treating China as a market economy in its antidumping calculations. This will be difficult for the United States to accept. However, if the United States can get enough concessions in other areas (such as SOEs and overcapacity in steel production) and can impose some additional disciplines on China’s own abuses of antidumping measures, perhaps it could go along with this demand.

Similarly, there has been talk of revising the review of foreign investment carried out by the Committee on Foreign Investment in the United States (CFIUS) so as to broaden its scope. Chinese companies have previously challenged CFIUS decisions blocking their investment, and expanding the scope of this review is likely to be of concern. As part of a negotiation on trade and investment, the United States could commit to maintaining the existing focus for reviewing Chinese investments and keeping the review process from being abused.
Since we wrote that piece, the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) has provided a legal framework to expand, rather than limit, the scope of CFIUS review. However, some of the details are still to be determined, and the U.S. could apply the law in a narrow way so that the process will not impede investment unreasonably. Relatedly, the U.S. could relax some of its restrictions on selling high-tech products to Chinese companies, in areas where national security is not at issue. These are just a couple ideas, and there are many other possibilities.

We are more skeptical of a significant deal than some commentators seem to be, but we do think there is a chance, although it will almost certainly take longer than 90 days. But the Trump administration needs to offer something in exchange for any concessions by China. If the administration is not anticipating giving something to make a U.S.-China deal look balanced, the prospects for a deal do not look very good at all.



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