By William Reinsch
Since the NAFTA negotiations are on vacation for another week, I’m going to take a break from that as well and talk about my longtime favorite subject, China. Thanks to the good offices of Matt Goodman and the Center for Strategic and International Studies (CSIS), I was fortunate last week to spend a brief time in Beijing discussing trade and economic policy issues with Chinese scholars and officials.
I came away with the clear impression that we appear to be stumbling, like a slow-motion train wreck, into an economic crisis that no one seems willing to stop even though there is plenty of time to do so. The Chinese, pumped up by their successful 19th Party Congress, see themselves on the way up and are determined to do what they’re going to do, regardless of its impacts on others. Complaints about Chinese protectionism are met with the response that our protectionism is much worse; examples are hurled in both directions, and no quarter is given. The Americans are caught between trying to explain Donald Trump and pointing out that on the specific issue of Chinese trade and competitiveness practices the U.S. business community is largely on his side, believing that his section 301 investigation is, at long last, focusing on important and serious economic issues that divide our two counties. (That is not to say there is widespread optimism that the investigation will have a happy ending — for anybody — just relief that it is, if nothing else, tackling the right problems).
During the conversation, it dawned on me that there are two competing ways to solve our problems. Our president says the problem is a very large bilateral trade deficit — $347 billion last year. He has defined all of our trade problems the same way — by looking at the size of the deficits and announcing his determination to shrink them. If that is the problem, then the solution for China is simple — buy more oil and other commodities from us.
Oil is the most obvious candidate now that our crude oil export ban has been lifted, and there are signs that the Chinese have figured this out. Last year, the U.S. exported nearly 600,000 barrels per day (BPD), more than 60% of which went to Canada while 3.7% went to China — about 22,000 BPD. So far in 2017, however, exports have risen to nearly 1 million BPD, 20% of which are now going to China, a significant increase in its share of a larger pie. Last year China also took nearly 4% of our exports of finished petroleum products, or 181,000 BPD.
In other commodities, we exported 900 thousand tons of wheat to China last year, which ranked ninth in our exports. (Mexico was number one, taking three times our sales to China, a timely reminder of the stakes involved in NAFTA withdrawal). China is already the number one destination for our soybeans, receiving more than 62% of our exports.
From a broader perspective, it’s frustrating that our largest exports to China are commodities (and trash, believe it or not, though that may be changing, as the Chinese have banned imports) rather than sophisticated manufactured products, but if you’re a president who looks only at the total deficit (and ignores services) it doesn’t matter. So, buy more of our raw materials and waste and reduce the deficit. It’s that simple!
Of course, it’s only that simple if you’re Donald Trump. If you’re part of the American business community, you’re a lot more worried about “Made in China 2025” which goes after the crown jewels of our competitiveness — our intellectual property — and Chinese theft of it, forced transfers of it, and determination to subsidize their own high tech industries to compete with us — problems we have not been able to sell our way out of.
Some of our differences can be resolved through negotiations. The Chinese have already promised not to steal our IP, so promising again will not be a stretch for them. To the extent discrimination against foreign companies in China is related to corruption — officials favoring domestic companies where they have a family or economic connection, for example — it is very much in China’s interest to put a stop to it.
Other differences, primarily those relating to information and communications technology such as data localization and demands for access to data or to source code, will likely be impossible to bridge. We view them as trade and competitiveness issues, but for China they are national security and public control issues and not susceptible to resolution in a trade negotiation. Underlying that is a fundamental trust issue. They believe our ICT products are compromised, and, truth be told, we believe the same thing about theirs. Unless we can resolve the trust issue, we will not make much progress on the trade issue.
In those sectors, they are simply not going to let us in to any significant degree, and the Trump response will probably be to do the same thing to them here. That makes the important issue whether we can compete successfully with China in third markets. And that is a struggle not only of sales but of rules and standards that ideally would give us an edge. That’s why TPP was so important and why TTIP is still important — they’re a means of crafting an economic world that fits our vision of competition rather than China’s. And it means dealing not only with China directly, where we are beating our heads against the Great Firewall, but with third countries that are likely to be more sympathetic because they face the same challenges.
That’s a very different path than selling more commodities, but I wouldn’t bet on the administration figuring out that it is the better one.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.
Correction: This article has been updated to reflect that the U.S. exported 900 thousand tons of wheat to China last year, not 900 million.