Half empty or half full: China-US trade relationship, a matter of perspective

By Einar Tangen

As the Comprehensive Economic Dialogue (CED) between China and the US approaches, and the 100 day Action Plan comes to a close, are China and the US closer to, or further from, a mutually agreeable and sustainable trade relationship?

The first issue is, will the US administration, under Trump, be able to even focus on trade with China. The DPRK nuclear issue is still front and center; Trump’s son’s meeting with a Russian lawyer is adding fuel to his Russia problems; his domestic agenda based on pulling $700 million dollars out of Obamacare, passing tax cuts, adding a trillion each to military and infrastructure spending, banning Muslims, getting Mexico to pay for a border wall, has not even left the ground. Trump’s popularity ratings are at the lowest level for any president, at this time in his term; since being inaugurated he has been hit with 134 lawsuits, as of May 5th and his America First and Twitter diplomacy has degraded US favorability and left him with few friends.

Along the way Trump has cast doubt on NAFTA, NATO, the media and America’s traditional allies and trade partners, including Mexico, Canada, China, Japan, South Korea and any other country that has a trade surplus with the US.

In terms of China, Trump talked tough during the election campaign, but seemed quite amiable when he met with Xi at Mar-a-Lago. But, we are now entering stage two of the relationship. 

Chinese President Xi Jinping (3rd R) and his U.S. counterpart Donald Trump (3rd L) hold the second round of talks in the Mar-a-Lago resort in Florida, the United States, April 7, 2017.[Photo: Xinhua]

Stage Two

Stage one, the 100 day plan, touched on low hanging fruit, like beef for poultry exports, energy and genetically modified seeds, financial services and an upgraded US presence at the Belt and Road Forum, minor issues, which have been implemented. But, these small victories will not form the basis of a sustainable global trade relationship. 

So what are the issues between the US and China?

The US

From the US perspective, not just Trump’s, the larger issue is America relative economic decline and China’s rapid economic advance amid the post WWII/Cold War multipolar power shift. 

The new reality is that between 2001 and 2016 the worlds GDP went up by roughly 250%, during that time the US’s GDP grew 70%, while China’s GDP grew 700%. The percentage of world’s GDP, produced by the US, went down from roughly 32% to 16%, while Chinas share went form 4% to 14%. 

China benefitted from its cheap plentiful labor and a government that focused on planning and infrastructure. The jobs that moved to China, like the rest of Asia, did so for cheap labor, and in some cases lax environmental standards. No one in the US could legally work for 120 dollars a month, nor would any company, located in the US, be allowed to pollute with impunity. 

Contrary to the dialogue, the US did not suffer, manufacturing output doubled, corporate profits increased dramatically; but, due to competitive pressures from the EU, S Korea and Japan, which produces the same products, businesses turned to automation to compete; factory jobs declined and people were laid off, especially after the 2009-09 financial crisis.

The populist emotional response, which Donald Trump tapped into, was that somehow the US was cheated and that those who had a trade surplus, like China, Mexico, Canada, Germany, S. Korea and Japan were to blame. 

No attention was paid to where the majority of the profits went, (example: Apple accounted for over 70% of cell phone industry profits between 2005 and 2015, by paying their Taiwan owned mainland based assemblers only 3 to 5 percent above the manufacturing costs. Even though the parts came from S. Korea, Japan and Taiwan region, the total values of the manufacturing was booked as coming from China). 

The reality is that as China grew, the US prospered, but while a few did well, the majority was left marginalized. 

China

From China’s perspective, the goal it not to run large surpluses with the US, but to try to move its economy forward to the point it can avoid the “middle income trap” and start competing with first tier economies. 

Chinese officials want the US to allow investments by Chinese firms. China desires to upgrade its technology and diversify its investment base. Green energy tech which can help repair the damage, caused by unregulated growth, robotic technology which can help it stay competitive and deal with its greying population and new materials and manufacturing technology which can create the products of tomorrow. CIC, China’s sovereign wealth fund, is interested in diversifying its portfolio and has patient money which could be used to help fund much needed US infrastructure. 

In the end the barrier is the trust deficit between the two nations.

A matter of worldview and style

As the CED, approaches, there is one more elephant in the room, the outlook and style of two very different leaders. 

Trump

Trump is brash, inexperienced, shoots from the hip, believes his judgment alone is correct and that he is going to deal his way into making America First even if it means going it alone. 

Xi

Xi is an experienced government leader, relies on a consultative process and believes that China needs to upgrade and improve trade ties regionally and around the world to prosper. 

Resources

The US is rich in resources and has finally ended its dependence on foreign energy. 

China is dependent on imported resources and open markets for its value added goods. 

Ideology and Economy

Ideologically, Trump believes in American Exceptionalism, while Xi believes that one learns from history and culture.

Economically, Trump is focused on reducing the deficit and issues like steel imports. Trump wants jobs brought back to the US, even if they are not sustainable. He envisions a more isolationist US which uses a mix of security and trade issues to create better bilateral trade deals. A kind of hub and spoke design, where the US is the hub and the bilateral trade agreements are the spokes, which keeps the economic wheel turning. 

On China’s side, it has become the biggest buyer of US crude and is interested in buying US natural gas, both areas which could impact the deficit. Xi is focusing on expanding regional and world trade using the Belt and Road Initiative (BRI). To Beijing, it represents an opportunity to build new markets, while preventing China from being bottled up on it sea routes.

Military

Military, the DPRK, Freedom of Navigation (FON) patrols, THAAD missile deployments, arms sales to Taiwan, encouragement of India and the US’s 200 plus bases sprinkled through Asia, are a constant reminder that the US sees China as a rival power, which it is intent on checking. This makes Chinese reliance on US energy exports problematic. 

Conclusion

In summation, the first 100 days was the easy part, the real work lies ahead, assuming Trump has the time and inclination to focus on it. Differences in outlook, style and perspective are unlikely to be resolved with Trump, and as they represent sentiments shared by the many who supported him, it will be an ongoing issue. The best Beijing can hope for is perhaps small victories, which chip away at the issue, rather than a definitive global settlement.

(Einar Tangen is a China-based American commentator)