Can Trump Handle China?

(Photo: AP/Andrew Harnik)

Finally, the much-anticipated day is upon us. As China’s President Xi Jinping visits President Donald Trump at his winter White House in Mar-a-Lago on Thursday and Friday, we may see some of the true mettle of the new U.S. leader.

During the election campaign, he proclaimed that he would create American jobs and raise wages by quickly turning around the massive $380 billion U.S. annual trade deficit with China. He charged that China was manipulating its currency to keep it undervalued versus the dollar, thereby artificially maintaining low prices for Chinese exports to the U.S. market. He said that “on day one” of his new administration, he would formally declare China a currency manipulator and take action domestically and within the International Monetary Fund to stop the manipulation and to achieve fair market currency values. He also said that he would impose tariffs as high as 45 percent on U.S. imports of Chinese goods and services in an effort to halt unfair trade and to correct the burgeoning U.S. trade deficit.

So far, however, none of this has occurred. Trump has not yet declared China a currency manipulator. Here his task has been complicated by the fact that while China is indeed actively controlling the exchange rate of its currency, it is presently controlling it in a way that is raising rather than lowering the value of the Chinese yuan versus the U.S. dollar—making U.S. exports cheaper and imports from China more expensive.

But nor has Trump announced the imposition of any tariffs on Chinese imports or any support for U.S. exports to China or elsewhere. All of which raises the question of what exactly Trump or any president can actually do to change the nature of the U.S.-China economic relationship.

Let’s keep in mind that America’s relationship with China is a very broad, multifaceted phenomenon. It may feel good to say that America will just slap a 45 percent tariff on imports from China. But can America actually do that? Not without some proof of Chinese subsidies or other infractions of trade rules, and not without going through the procedures of the World Trade Organization, of which both the United States and China are members, and not without going through domestic investigatory and adjudication procedures within the U.S. government and with the International Trade Commission.

But let’s suppose, that you are Trump and you don’t care about these niceties. You are just going to give Xi a piece of your mind and let the chips fall where they may. Ah, except there is this little problem with North Korea. It has been launching missiles and testing nuclear weapons. It will soon have, if it does not already, the capacity to hit the west coast of the United States with a nuclear bomb. It could obliterate much of South Korea, which you the president are committed by treaty to defend. The same is true of Japan. The only country with any apparent influence over North Korea is China. So you could really use some help from Xi to deal with these pesky North Koreans. But how much help do you think he’ll want to give after you tell him you’re slapping him with a 45 percent tariff?

Or look at another conundrum. China is the biggest market in the world for Boeing airliners exported from America. But Boeing has a big competitor in the form of the European Airbus. So, if you slap a tariff on Xi, is he going to shift orders from Boeing to Airbus? How many jobs will that cost in the Seattle area and in South Carolina where Boeing manufactures? Or think about that iPhone with which you tweet. It can’t be made in the United States. Just think. If you slap a tariff on it, you might have to give up tweeting. There must be a better way. Right?

Yes, there is, but it won’t be quick or easy, and it will require you, the president, to reverse a couple generations of American economic doctrine and foreign policy orthodoxy. Since the end of World War II, the United States has assumed that it would automatically be the world’s richest, most productive, most technologically advanced economy with the highest standard of living by dint of being an open-market, free-trade system. Thus, the primary focus of U.S. foreign policy has been to maintain global geopolitical dominance by allying with and protecting countries in Western Europe and in East Asia.

Indeed, in Asia, the United States does not even have reciprocal alliances. It has unilaterally committed itself to defend South Korea, Japan, and the Philippines. A large part of U.S. policy has been to assist the economic development of these countries by encouraging them to develop export industries and to export to the open American market while keeping their own markets relatively closed to U.S. exports and even in many cases to U.S. investment. And while the United States does not protect China militarily, it has promoted China’s economic and technological development by agreeing to lopsided trade and investment arrangements on the basis of the theory that globalization is Americanization and that by dint of trade and economic development, China will become more liberal, democratic, friendly toward America, and a pillar of the global economic/political system.

Because that assumption now appears to be seriously flawed, and a more nuanced and more realistic policy is necessary. On the one hand, Trump would be well advised to achieve an overall geopolitical modus vivendi with Xi’s China. The existential interests of the two countries are not opposed. They do not desire to conquer or rule over each other. They do not share borders and neither desires conflict with the other. If an agreement of some kind could be reached between Trump and Xi for the two sides to co-exist in an orderly way in the South China Sea where their forces face each other, a great contribution to the future peace and prosperity of both would be made.

At the same time, the economic doctrines of the two are quite opposite. China’s is a state-guided, authoritarian, and partly state-owned economy that limits market access, limits foreign investment, compels technology transfer as a condition of market access, aims to achieve full employment and growth by accumulating trade surpluses, and actively seeks to surpass the United States industrially and technologically. The United States should not have to react in a hostile way, but it should react reciprocally. It should apply market-access conditions, investment guidance and control, anti-dumping, and other trade measures essentially to mirror or offset Chinese measures.

Beyond this, the United States should also resolve to restructure its economy to have essentially balanced trade over the long term. This doesn’t mean that trade has to be balanced every year, but it has to be roughly in balance over a number of years. Otherwise, America will continue to accumulate foreign debt while gradually eroding its wealth-producing capacity. Such balanced trade could be achieved by the imposition of charge (call it a market access charge—MAC) on all foreign capital flowing into the United States. This charge could be adjusted to be high when the U.S. trade deficit is high and low when it is low. The proceeds could be used to make massive infrastructure investment that would provide jobs and advanced infrastructure for Americans for decades to come.

The U.S. corporate tax system and income tax should also be altered so as to encourage saving and investment while dampening excess consumption. A proposal for taxing corporate cash flows arising from imports and exempting from tax those cash flows that arise from exports is currently making the rounds of consideration in Congress. This so-called Border Adjustment Tax is, in principle, a good idea and should be actively pursued.

Finally, the United States must consider actively countering any future currency manipulation by engaging in counter-manipulation by buying the currencies of those countries trying to artificially reduce their currency values by selling them for dollars.

A combination of these policies would assure long-term balance in U.S. trade with better employment and earnings potential. Is Trump capable of these nuanced policies? We’ll soon find out.

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