China: Keeping the Lipstick off the Pig
By William Reinsch
Last week’s CED session with China was surprising because it avoided the standard outcome of these things — a long list of minor accomplishments which are hailed as significant breakthroughs. In other words, instead of putting lipstick on the pig, for the first time they just trotted out the pig.
This is a new development. As recently as last May, Secretary Ross was referring to the short list of initial results from the 100 day plan as, "…more than has been done in the whole history of U.S.-China relations on trade." (A statement which completely ignores their WTO accession negotiation, among other things). I thought at the time that the administration had fallen into the conventional pattern of producing mice and calling them tigers, which was oddly reassuring, since it fit the pattern of previous, more conventional, administrations. Instead, they have gone back to breaking the mold.
At this point, that leaves us with two questions: why did it happen, and what happens next.
The answer to the first appears on the surface to be fairly simple — the U.S. made some significant demands, at least on steel overcapacity, and expected specific commitments which the Chinese were not willing to provide. To the administration’s credit, rather than talk about other things and produce the mouse, it chose to trot out the pig and make clear that the talks had failed to achieve anything concrete. If administration officials were surprised, they shouldn't have been. With China gearing up for its Party Congress in the fall, they are in no position to either make concessions to the Americans or start a fight with them. Either would lead to unwelcome criticism of Xi Jinping. Their goal is to kick the can, and so far they've succeeded. A fair inference would be that the American side should have done more preparation and would have been smart to rely on career China experts for advice.
What happens next is more complicated. One answer is that for some of the president’s advisors, failure is a convenient justification for the unilateral action against China that they are eager to take. They didn’t do what we wanted, so now it’s ok to punch them in the face, particularly on steel, which is very much on the president’s mind these days because of the impending arrival of Commerce’s section 232 study. I won’t debate the merits of that approach here but would note that there are plenty of other people inside the administration who will argue vigorously that it is a bad idea.
That presents the president with a short term choice — riding on his success at the G20 meeting in Hamburg and waiting for the revitalized Global Forum on steel overcapacity to produce something by its November deadline, trampling all over Hamburg and taking immediate unilateral action, or announcing unilateral action but postponing it until after the Global Forum's November deadline for progress. The last would increase his short-term leverage without having to take action, and it would split the decision between the hardliners and the cooler heads, but it would leave him on the hook five months from now if there is no progress.
But steel is just the short term. The larger issue is how to deal with China on the many issues that divide us both economically and politically. The administration may be learning via the CED failure and its inability to get Xi Jinping to deal more aggressively with North Korea that a transactional approach is not the best one. At best it produces small gains in narrow areas, like beef, where all the early hard work was done by the Obama administration anyway. Instead, what numerous observers have recommended is that they need an overall strategy, one which takes into account China’s internal politics and timelines, clearly prioritizes our goals, and identifies the various tools at our disposal to advance them, including use of multilateral pressure — something this administration has ignored in its rush to offend most of our friends and allies.
In developing such a strategy, if it cannot wean itself off the dated “trade deficit is everything” idea, the administration would be smart at least to focus on the other half of the equation. There are two ways to reduce a deficit — buy less or sell more. The president and his advisors seem primarily interested in buying less. The real issue for American business — and for the long-term competitiveness of our economy — is the persistent Chinese effort to acquire and exploit American ideas and technology, legally or illegally, and deny U.S. companies the fruits of their innovation by pushing them out of China and eventually undercutting them elsewhere. If we cannot address that, we cannot materially reduce the China deficit, and we also compromise our ability to compete against them in third markets, which will doom us in the long run.
So, this is a good time for the administration to remember the energizing power of failure — it teaches us important lessons and inspires us to work harder and smarter the next time. They took an important step in putting away the lipstick, but now it’s time to concentrate on producing real tigers.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.