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The Trump Administration’s Trade Policy and Sino-American Economic Relations

Parallel Perspectives on the Global Economic Order, CSIS

Song Guoyou, The Trump Administration’s Trade Policy and Sino-American Economic Relations,in Matthew P. Goodman Parallel Perspectives on the Global Economic Order, CSIS, September 2017

Donald Trump was elected the president of the United States. And “Buy American, Hire American” has become his openly declared core concept of governance. As soon as he took office, the Trump administration officially withdrew from the Trans-Pacific Partnership agreement, and called for a renegotiation of the North American Free Trade Agreement, which indicates the rise of U.S. trade protectionism. Since the outbreak of the financial crisis 10 years ago, U.S. trade protectionism has become a major uncertainty in the healthy development of the global economy, affecting Sino-U.S. economic and trade relations.

Trade Protectionism

International trade has long been an essential engine of global economic growth. After World War II, the relatively open trade policies and liberal trade philosophy worldwide constituted the basic strength promoting the global economy. However, in recent years international trade growth has been lower than global economic growth. International trade has failed to be a positive factor in global economic growth, and, on the contrary, has become an obstacle. The United States, as the world’s largest economy and the largest importer, plays a vital role in international trade. If the Trump administration were to embrace trade protectionism, it would make already weak global trade worse, and thus make it more difficult for global economic growth to get support from trade growth.

What we should be worried about more is that the trade protectionism embraced by the United States based on its own economic interests may bring out underlying trade protectionism globally. The United States’ unilateral trade protectionism would definitely affect the normal trade interests of other countries, and thus other economies would either resist reluctantly, retaliate correspondingly, or even follow actively. Trade protectionism may be adopted worldwide.

U.S. trade protectionism would not only affect global trade, but also negatively influence global economic governance. In line with the concept of trade protectionism, the Trump administration holds that the multilateral mechanisms of economic governance, such as the World Trade Organization and the G20, have little effectiveness, and moreover do harm to U.S. economic interests. Therefore, Trump prefers to solve economic problems through unilateral and bilateral approaches. The Trump administration doesn’t show a strong will in global multilateral coordination, and this may block grand economic policy cooperation among big states. Thus, global economic governance will probably be stagnant. For example, Trump has rejected the Paris Agreement, the cornerstone of global climate change, which arouses much worry.

Focusing exclusively on its own interests, the United States seems to have descended from a promoter to an obstacle of globalization, which will hinder global trade growth and frustrate global economic governance. The international economic system under protectionism will erode the foundation of the global economy, and the economies, including the United States, will find it difficult to get the best resources allocation from globalization.

Makes No Difference

The Trump administration believes that the huge trade deficit in foreign trade is the crux of the various economic problems of the United States, claiming that rather than getting more economic benefits from international trade, the United States has been experiencing the departure of manufacturing, huge trade deficits, and declining economic competitiveness because of international trade. Thus, Trump and his team argue that the United States should reverse the “unfair” distribution of trade benefits by trade protectionism to revive the manufacturing sector and strong economic growth. In fact, despite the large scale of foreign trade, it has little impact on the GDP of the United States. According to the World Bank, imports and exports of the United States in 2015 accounted for only 28 percent of its GDP, about 48 percent of the world average, the lowest in all major economies.1 Considering that the impact of trade on the U.S. economy is relatively small, it is hard to say that trade is the major “cause” of the U.S. economy’s problems.

For such a large economy like the United States’, the real “cause” needs to be found from the inside. In short, the fundamental causes of its current economic struggles lie in the deep problem of economic, political, and social structures in the United States. The problem of its economic structure is mainly reflected in two imbalances: first, the imbalance between the real economy and the virtual economy. The proportion of agriculture and manufacturing in the U.S. economy declines year by year, while the proportion of services increased. The virtualization of the U.S. economy is too high. The second imbalance is between savings and consumption. The U.S. national savings rate is too low, and the debt ratio is quite high. It is a typical overdraft economy. If these two major economic structural imbalances can’t be alleviated, it will be impossible for the United States to get out of its economic dilemma. The problem of political structure could be observed in its intensified political polarization. The positive adjustment of economic structure requires effective cooperation between political forces. However, opposing parties in American domestic politics are increasingly polarized. The Democrats and the Republicans define national interests based on their respective party standpoints, making national policies by partisan preferences. Shortly after Donald Trump from the Republican Party took office, his administration adjusted healthcare reform, financial reform, and energy policies of the previous Obama administration in the opposite direction, which had only been implemented for a couple of years. And this shows that it’s been very difficult to unite behind a general consensus in the context of current U.S. politics, which not only makes it almost impossible to correct structural economic illnesses in a systemic and continuous way, but also wastes valuable time in reforming and increasing the cost of policy implementation, and becomes a drag on economic restructuring. The social problem is the increasingly serious polarization between rich and poor. According to statistical data, the United States has already emerged from the financial crisis. However, life for most people in the United States hasn’t turned subsequently better. The wealth of the middle class continues to shrink, and the living conditions of people at the bottom are becoming more difficult. But in the meantime the wealth proportion of the richest is increasing. A differentiated and even torn society can’t create a stable foundation for economic development.

The argument that the trade deficit causes job losses among U.S. manufacturing workers is also questionable. A majority of studies suggest that the most critical reason for the loss of manufacturing jobs in the United States is the increase in automation and the job replacement of other technological factors, rather than the trade deficit. Not to mention that a series of economic linkages, including imports of goods from abroad and sales in the United States, also create tens of millions of jobs. The number of jobs created by imports is even bigger than the number of jobs brought about by exports.

Trade protectionism has historically proved to be the wrong choice. It takes results as reasons to accuse foreign trade and the trade imbalance as “unfair,” rather than to face up to and formulate appropriate public policies to deal with the increasingly serious domestic economic, political, and social structural problems. And it would be of no help to solve its own problems.

Undermining U.S. Interests

The Trump administration, driven by “American interests first,” hopes to reduce imports, increase exports, and thus improve its international balance of payments through policies of trade protectionism. This move will have a certain influence on the economies of other countries. Especially for those with close trade ties to the United States, the short-term impact could be great. However, trade protectionism cannot truly solve the problems of the United States, and moreover will also cause great losses to the United States.

First, trade protectionism would actually harm the investment interests of U.S. multinational corporations. The Trump administration cares about the country’s domestic economic interests. As criticized by the U.S. business mainstream, it is a narrow view. In fact, U.S. economic interests have long extended beyond national boundaries. American multinationals are the biggest beneficiaries of globalization. They expand globally and extend their strength. These multinational companies have gained the greatest benefits of globalization and trade liberalism. When the United States waves its protectionist sticks at other countries, the major loss for those countries is the quantity of trade, while the loss of U.S. multinational companies will be their trade interests. In the extreme cases of trade war, U.S. multinationals are likely to be the target of other countries in their trade retaliation.

Second, U.S. economic competitiveness will also be hurt. In the short term, it seems possible to support U.S. domestic industries and enterprises that lack competitiveness by adopting protectionism to restrict the imports of products from other countries. However, competition is the essential way for an industry to grow. The greater the protection for those industries and enterprises that lack competitiveness, the less competitive they will be. In contrast, industries and businesses of other countries that are being competed with will take more measures to improve their competitiveness. The different consequences will further widen the economic competitiveness gap between some industries and enterprises in the United States and in other countries.

Third, U.S. global economic leadership will be severely weakened compared to other countries. The United States, which has become the world’s number one and played the leading role in making global economic rules, relies on its open market and the idea of a free economy it promotes. Putting aside whether the conclusion is correct or not, the only thing that the Trump administration calculates is their own gains and losses in trade. He and his team have measured neither the macro benefits that the United States gained as the leader of the global economy, nor the strategic benefits that are related to this position, and have never considered the impact of trade protectionism on other countries and the global economy. An increasingly inward, closed and selfish America could not lead other countries to the future, and even its allies would abandon the protectionist America.

In the era of globalization, if the United States were to embrace trade protectionism, all countries would be losers. The United States, as the largest economy and the country that gains the most benefits, will also suffer huge losses. What the United States needs to do is not to go farther on the wrong path of trade protectionism, but to effectively enhance economic competitiveness through structural reforms. Benign competition rather than vicious protection is the right way for the U.S. economy.

Promote Sino-U.S. Cooperation

Trade war is not an option for settling Sino-U.S. disputes in economic and trade relations, and those issues can only be resolved through negotiations. In order to deal with bilateral economic and trade issues, President Xi Jinping and President Trump agreed to solve the economic disputes between China and the United States through the Comprehensive Dialogue mechanism and have made a “Hundred Days Plan” to carry out economic and trade cooperation after meeting in Florida in April 2017.

In general, with the first Xi-Trump meeting and the Comprehensive Dialogue as a new starting point, combined with the formulation of the Hundred Days Plan, Sino-U.S. economic and trade cooperation should focus on the following key areas in the Trump era:

1.Work on the distribution of benefits. Profits are the fundamental driving force in economic and trade relations, and the complaints of the United States over Sino-U.S. economic and trade relations are based on the belief in an imbalanced distribution of benefits, that is, China gets more, and the United States receives relatively less. But China argues that the distribution of economic and trade interests is a win-win and fair, and thus the United States has also gained a lot of benefits. So, what’s the real situation? To answer this question requires research that both sides can generally accept in a short period of time. Only by the objective analysis of the current situation of the distribution of benefits could the biases and criticisms of both countries in economic and trade relations be eliminated, and measures to promote Sino-U.S. economic and trade be specifically made.

2.Identify policy distortions. After accurately acknowledging the distribution of economic and trade interests, the two sides should discuss the sources of those interest. The distribution of most economic and trade interests is just and normal, and mainly reflects the globalization of the division of labor and the differences in factor endowment of the two countries. For these interests, even if the distribution between China and the United States were imbalanced, the two countries can only accept them. Focus should be put on the imbalance in benefits distribution caused by policy distortions, and the U.S. dissatisfaction with China mainly stems from this. For example, the United States has criticized China for its so-called manipulation of the RMB exchange rate, government subsidies, and policies toward state-owned enterprises, and argues that it’s these policies that lead to the imbalance of bilateral trade. Meanwhile, China argues that it is the United States’ unfair export restrictions on high-tech products to China and the overly strict direct investment review mechanism that cause Sino-U.S. economic and trade problems.

3. Adjust domestic structures. Sino-U.S. economic and trade relations are fundamentally an extension of the domestic economic development structures of the two countries, so the problems in economic and trade relations cannot be solved only through adjusting bilateral ties. In order to alleviate the economic and trade contradictions between China and the United States, both countries need to find the root problem in economic and trade relations from the perspective of domestic economic development, and promote the adjustment of domestic economic structures through the sustainable development of bilateral economic and trade relations. Ignoring domestic economic problems and relying on adjustments in bilateral economic and trade relations and the domestic economic restructuring of other countries are not sincere ways to solve problems. Taking into account the fact that China and the United States are close in economic power, there are no such negotiating skills that could force the other party to accept an unfair offer.

4.Promote measures of cooperation. In no case would the mainstream of public opinion and business organizations of either China or the United States like to see Sino-U.S. economic and trade confrontation. Thus, both sides and even the international community hope to see practical solutions come out, which is of vital importance in enhancing strategic mutual trust in the economic and trade areas and strengthening the grand direction of Sino-U.S. cooperation in the future. The working teams of both China and the United States should be theoretical as well as pragmatic, taking either small profits or the overall situation into consideration, and through close cooperation, put forward project programs and policy adjustments that both sides are satisfied with.

Link: http://www.csis.org/trump-administrations-trade-policy-and-sino-american-economic-relations

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