With China, Trump's Team Should Focus on Realistic Objectives

President Trump's star-studded trade envoy left China last Friday, failing to make any real progress in trade talks.  This should come as no surprise, as the U.S. came out guns blazing in initial trade negotiations with aggressive demands, making it clear that Beijing and Washington are worlds apart in goals for trade relations.

The trade talks come at a time of widespread uncertainty in international trade, and amid an ongoing trade skirmish between the two countries.  While negotiations are expected to continue, a quick resolution to the trade conflict seems now out of question, and a tit-for-tat trade war seems likely to become reality.

With a large envoy of top economic and trade officials – including two cabinet secretaries (Wilbur Ross and Steven Mnuchin); Trump's trade adviser, Peter Navarro, and economic adviser, Larry Kudlow; and U.S. Trade Representative Robert Lighthizer – it appeared that the U.S. was serious and determined to make a deal with the Chinese.  However, the U.S. eight-point plan to "balance" the trade relationship with China clearly shows that the U.S. is overestimating its leverage and reflects how unlikely the U.S.-China trade dispute will be resolved any time soon.

The plan continues the Trump administration's aggressive efforts to get "better" and "fairer" trade deals for the U.S. through unilateral action and outlandish demands.  The U.S. has essentially asked China to change the entire structure of its economy in one swoop, with more tariffs or other restrictive measures inflicted if the Chinese fail to comply, and demands that the Chinese refrain from retaliating against U.S. actions.

The U.S. requests for China include slashing tariffs on American products to levels no higher than corresponding U.S. tariffs, strengthening intellectual property (I.P.) rights protection and enforcement, easing investment restrictions in China for U.S. companies, and eliminating all subsidies linked to its "Made in China 2025" industrial policy.

The U.S. insists that China cut its bilateral trade surplus with the U.S. by $200 billion – almost two thirds – by 2020 through increased purchases of U.S. goods.  This demand is highly in line with Trump's misguided view of trade surpluses and deficits as a country's economic scorecard and his continued disdain for the bilateral trade deficit with China.  However, reducing the trade deficit with China shouldn't be a goal at all, as it's a rather inconsequential measure that reflects macroeconomics and the comparative advantages of each country.

Another aggressive U.S. demand is for China to guarantee that it will refrain from taking retaliatory action in response to U.S. restrictions on Chinese investments or imports and will drop current retaliatory actions and WTO disputes.  Additionally, Washington asked Beijing not to target U.S. farmers and agricultural products.

These are unreasonable demands, as China has been retaliating against U.S. tariffs in kind over the last few months.

In response to American tariffs on steel and aluminum, China imposed retaliatory tariffs on U.S. products totaling $2.4 billion.  Chinese officials threatened to retaliate against Trump's Section 301 tariffs by announcing a list of 106 U.S. products that may be subject to its own 25-percent tariff, covering $49.8 billion in U.S. imports.  Finally, China most recently imposed preliminary anti-dumping duties of 178.6 percent on U.S. sorghum, and there are reports of China deliberately not buying U.S. soybeans – a top U.S. agricultural export to China.

China has made it clear it will fight American levies.  A continued threat of tariffs and a comprehensive list of aggressive demands will unlikely bear any fruit.  Instead, Washington should focus on starting negotiations with more feasible and less intrusive individual requests.  This would show seriousness and willingness in making an actual deal – not just a bullying ploy – and the Chinese would be more willing to negotiate.  Ultimately, the goal needs to be centered not on the bilateral trade deficit and an all-encompassing agreement, but on lowering China's barriers to trade and pushing the Chinese toward more liberalization.  

Fortunately, China is showing willingness to further liberalize its economy and lower trade barriers, irrespective of U.S. threats.  At the annual economic forum this year, President Xi pledged to further open China's markets for trade and investment, committing to boost imports, ease restrictions for foreign investment, lower automobile tariffs, and provide greater protection for I.P.  While China hasn't implemented these proposals yet, we should take advantage of Xi's willingness to open Chinese markets more.

A large-scale, bilateral trade agreement with China would be the ultimate objective but is unlikely to materialize.  There are too many moving parts and concessions that China would currently be unlikely to accept.  This is apparent in the list of demands given to China this past weekend that resulted in retaliatory demands from China.

Instead, the main intent of Trump's trade team should be to ensure that China's recent intent to open its economy is followed and address systematic concerns about China's trade practices that most impact U.S. interests.  In exchange, the U.S. should be willing to drop the new tariffs on Chinese imports and accept other demands.

Formal negotiations on specific issues – such as I.P., foreign investment, and tariff reductions in certain sectors – should take precedence.  The investment agreement between Canada and China in 2014 is a great example.  A good place to start would be to ask China to cut its high tariffs in many sectors, such as reducing the 25-percent Chinese tariff on foreign automobile imports closer to parity with the American tariff of 2.5 percent.

Another is I.P. theft and forced technology transfers, which cost America between $225 billion and $600 billion annually.  Xi originally announced last year, and reiterated this year, that China will boost I.P. protections.  Talks should build upon this, ensuring that China lives up to its commitments, and work to ease restrictions of foreign investment into the country.  Rather than dangling tariffs, the U.S. should make it clear that a dispute will be brought to the WTO if the situation is not improved – a mechanism that has been highly successful in the past, with the U.S. winning around 90 percent of the WTO disputes it brings.

Fighting protectionism with protectionism isn't the answer.  No one wins a trade war.  China is known for talk and no action, but if the U.S. can approach the Chinese correctly, we can realize beneficial gains.  The U.S. strategy needs to refrain from its combative stance with the use of punitive tariffs and unobtainable blanket demands, and instead promote the common benefits of the large U.S. and Chinese markets while seeking small concessions in China's trade policy.

Unfortunately, if this bilateral, confrontational approach continues, more tariffs and a damaging trade war are sure to result, with American consumers bearing the costs.

Jimmy Sengenberger is president and CEO of the Millennial Policy Center, a public policy think-tank based in Denver, Colorado.  Jacob Dubbert is a fellow in economic opportunity and fiscal policy at the MPC.

President Trump's star-studded trade envoy left China last Friday, failing to make any real progress in trade talks.  This should come as no surprise, as the U.S. came out guns blazing in initial trade negotiations with aggressive demands, making it clear that Beijing and Washington are worlds apart in goals for trade relations.

The trade talks come at a time of widespread uncertainty in international trade, and amid an ongoing trade skirmish between the two countries.  While negotiations are expected to continue, a quick resolution to the trade conflict seems now out of question, and a tit-for-tat trade war seems likely to become reality.

With a large envoy of top economic and trade officials – including two cabinet secretaries (Wilbur Ross and Steven Mnuchin); Trump's trade adviser, Peter Navarro, and economic adviser, Larry Kudlow; and U.S. Trade Representative Robert Lighthizer – it appeared that the U.S. was serious and determined to make a deal with the Chinese.  However, the U.S. eight-point plan to "balance" the trade relationship with China clearly shows that the U.S. is overestimating its leverage and reflects how unlikely the U.S.-China trade dispute will be resolved any time soon.

The plan continues the Trump administration's aggressive efforts to get "better" and "fairer" trade deals for the U.S. through unilateral action and outlandish demands.  The U.S. has essentially asked China to change the entire structure of its economy in one swoop, with more tariffs or other restrictive measures inflicted if the Chinese fail to comply, and demands that the Chinese refrain from retaliating against U.S. actions.

The U.S. requests for China include slashing tariffs on American products to levels no higher than corresponding U.S. tariffs, strengthening intellectual property (I.P.) rights protection and enforcement, easing investment restrictions in China for U.S. companies, and eliminating all subsidies linked to its "Made in China 2025" industrial policy.

The U.S. insists that China cut its bilateral trade surplus with the U.S. by $200 billion – almost two thirds – by 2020 through increased purchases of U.S. goods.  This demand is highly in line with Trump's misguided view of trade surpluses and deficits as a country's economic scorecard and his continued disdain for the bilateral trade deficit with China.  However, reducing the trade deficit with China shouldn't be a goal at all, as it's a rather inconsequential measure that reflects macroeconomics and the comparative advantages of each country.

Another aggressive U.S. demand is for China to guarantee that it will refrain from taking retaliatory action in response to U.S. restrictions on Chinese investments or imports and will drop current retaliatory actions and WTO disputes.  Additionally, Washington asked Beijing not to target U.S. farmers and agricultural products.

These are unreasonable demands, as China has been retaliating against U.S. tariffs in kind over the last few months.

In response to American tariffs on steel and aluminum, China imposed retaliatory tariffs on U.S. products totaling $2.4 billion.  Chinese officials threatened to retaliate against Trump's Section 301 tariffs by announcing a list of 106 U.S. products that may be subject to its own 25-percent tariff, covering $49.8 billion in U.S. imports.  Finally, China most recently imposed preliminary anti-dumping duties of 178.6 percent on U.S. sorghum, and there are reports of China deliberately not buying U.S. soybeans – a top U.S. agricultural export to China.

China has made it clear it will fight American levies.  A continued threat of tariffs and a comprehensive list of aggressive demands will unlikely bear any fruit.  Instead, Washington should focus on starting negotiations with more feasible and less intrusive individual requests.  This would show seriousness and willingness in making an actual deal – not just a bullying ploy – and the Chinese would be more willing to negotiate.  Ultimately, the goal needs to be centered not on the bilateral trade deficit and an all-encompassing agreement, but on lowering China's barriers to trade and pushing the Chinese toward more liberalization.  

Fortunately, China is showing willingness to further liberalize its economy and lower trade barriers, irrespective of U.S. threats.  At the annual economic forum this year, President Xi pledged to further open China's markets for trade and investment, committing to boost imports, ease restrictions for foreign investment, lower automobile tariffs, and provide greater protection for I.P.  While China hasn't implemented these proposals yet, we should take advantage of Xi's willingness to open Chinese markets more.

A large-scale, bilateral trade agreement with China would be the ultimate objective but is unlikely to materialize.  There are too many moving parts and concessions that China would currently be unlikely to accept.  This is apparent in the list of demands given to China this past weekend that resulted in retaliatory demands from China.

Instead, the main intent of Trump's trade team should be to ensure that China's recent intent to open its economy is followed and address systematic concerns about China's trade practices that most impact U.S. interests.  In exchange, the U.S. should be willing to drop the new tariffs on Chinese imports and accept other demands.

Formal negotiations on specific issues – such as I.P., foreign investment, and tariff reductions in certain sectors – should take precedence.  The investment agreement between Canada and China in 2014 is a great example.  A good place to start would be to ask China to cut its high tariffs in many sectors, such as reducing the 25-percent Chinese tariff on foreign automobile imports closer to parity with the American tariff of 2.5 percent.

Another is I.P. theft and forced technology transfers, which cost America between $225 billion and $600 billion annually.  Xi originally announced last year, and reiterated this year, that China will boost I.P. protections.  Talks should build upon this, ensuring that China lives up to its commitments, and work to ease restrictions of foreign investment into the country.  Rather than dangling tariffs, the U.S. should make it clear that a dispute will be brought to the WTO if the situation is not improved – a mechanism that has been highly successful in the past, with the U.S. winning around 90 percent of the WTO disputes it brings.

Fighting protectionism with protectionism isn't the answer.  No one wins a trade war.  China is known for talk and no action, but if the U.S. can approach the Chinese correctly, we can realize beneficial gains.  The U.S. strategy needs to refrain from its combative stance with the use of punitive tariffs and unobtainable blanket demands, and instead promote the common benefits of the large U.S. and Chinese markets while seeking small concessions in China's trade policy.

Unfortunately, if this bilateral, confrontational approach continues, more tariffs and a damaging trade war are sure to result, with American consumers bearing the costs.

Jimmy Sengenberger is president and CEO of the Millennial Policy Center, a public policy think-tank based in Denver, Colorado.  Jacob Dubbert is a fellow in economic opportunity and fiscal policy at the MPC.