February 21, 2019

The Eagle Versus the Dragon

The Eagle Versus the Dragon

A Star in the White House

One of Donald Trump’s most frequently repeated policy pledges has been to drastically revamp the Sino-American relationship. The lugubrious president has not shied away from vociferously piling the blame on the PRC for a host of ills and problems that plague America, from stealing American jobs to “inventing the concept of global warming [..] in order to make U.S. manufacturing non-competitive.”

Trump has frequently denigrated past presidents’ efforts to deal with China; yet as the U.S. tries to extricate itself from the toxic fallout of the trade war, some of the very officials that cheered on the president’s initiative, are voicing fear that he is being outmaneuvered by Chinese President Xi Jinping and blinded by what they see as empty promises.

Specifically, what worries Washington insiders is the fact that the former reality-TV star possesses virtually no understanding of complex macroeconomic relationships that govern modern international commerce. They also fret about what they see as the president’s growing desperation to strike any kind of a “deal” just to calm the financial markets.

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The Deficit

One of the most salient examples of Trump’s lack of comprehension of how trade works, is his obsession with the trade deficit. Most serious economists do not worry that much about the deficit.

That’s because trade imbalances are affected by a very wide range of macroeconomic factors, including the relative growth rates of countries, the valuation of their national currencies, and their saving and investment rates.

“Trade deficits are just not that important,” according to Alan Blinder, a former Federal Reserve governor and a professor of economics. “They’re absolutely normal components of international trade.”

Blinder elucidates further, that trade deficits can become a problem if foreigners suddenly stop wanting to invest in a country. “That’s what happened to Greece,” he notes. “When it can be a problem is when the rest of the world decides you’re a credit risk,” says Blinder.

That hasn’t ever happened to the U.S. and it doesn’t seem that it will anytime soon. Foreign investors continue to pour money into American assets such as real estate and stocks trading.

Also, most serious economists do not see the trade gap as money “lost” to other countries. Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University explains in more detail:

“The U.S. purchases a great deal of goods from other nations, everything from petroleum and chemicals to shoes and cars, and when it does, it pays for them in dollars. As a result, countries such as China and Japan accumulate vast piles of American currency. At some point those countries have to exchange these dollars for something, and traditionally they’ve used them to buy U.S. assets, such as stock, real estate, and Treasury bills. So, the dollars that we send in exchange for goods, come back to us from foreigners in the form of investment, so it’s a win-win for the U.S.” notes de Rugy.

“Also, foreigners are big buyers of U.S. government debt, which results in a long period of low-interest rates,” de Rugy elaborates further. “Americans should be happy that there are countries willing to effectively lend the U.S. money at a lower price, because if they weren’t it would mean the interest on the debt Americans pay would be way higher, and it would mean a bigger share of what the government spends going to interest payments,” adds de Rugy.

Beans and Dollars

A case-in-point as to why some Washington insiders, believe that Trump’s “transactional” approach to trade talks is unwinding years of careful U.S. diplomacy is exemplified by the talks over soybean purchases.

During his recent meeting with Chinese Premier Liu He, Trump gushed about a Chinese offer to buy five million tons of soybeans; “That’s going to make our farmers very happy. That’s a lot of soybeans!’’ exclaimed a wide-eyed Trump.

Only what Trump saw as an Everest of soya was little more than a mound of beans. This seems especially true considering that even with this (yet to be finalized) purchase, China’s soybean purchases are still only about one fifth (or about 20%) of what they were in the last marketing year according to the American Farm Bureau.

Perhaps even more alarming is the fact that this offer contains no commitment to address the underlying cause of the slump in U.S. soybean exports to China – the retaliatory tariffs the Chinese government had to impose in response to the tariffs initiated by Trump.

According to Nathan Sheets – a former Treasury official under the Obama administration that was tasked with negotiating trade policy with the PRC – during his tenure, Beijing “made regular offers to buy more U.S. commodities,”  but the Obama administration and others before it declined such offers in favor of urging China to modernize its economy by “moving away from central planning,” states Sheets.

So even with these offers of new purchases, an enormous gap remains between current numbers on offer and purchase volumes of past years, and with it remains a great deal of uncertainty for American farmers.

Trump and the Trans-Pacific Partnership

The example above does not only illustrate Trump’s ignorance of data that is crucially relevant to any trade discussions, but his general lack of understanding of the dynamics of multilateral trade relationships.

During the election campaign, then-candidate Trump ranted and railed against the Trans-Pacific Partnership (TPP) agreement – a somewhat odd position to take for an allegedly “pro-business” candidate.

Although unable to articulate any of the details of the proposed agreement or why exactly he opposes them, Trump nonetheless made U.S. withdrawal from the TPP, one of his first orders of business after taking office.

The TPP intended to reduce or eliminate up to 18,000 tariffs on agricultural and manufactured products, boosting trade, economic growth as well as political ties between twelve nations.

American political and business elites have long considered the TPP to be an economic boon for the U.S. but have also believed that this deal could have been an instrument of boosting American influence over Asia-Pacific, while at the same time checking the expansion of China’s power and dominance in this region.

Now, without the U.S. to fill a clear leadership role, most countries that intended to be signatories to the TPP are doing exactly what the pact meant to prevent:  falling into China’s orbit by joining the Beijing-led trade bloc – the Regional Comprehensive Economic Partnership (RCEP) – simply due to lack of alternative options.

Economies of Scale and Theatrics

Perhaps one of the more alarming truisms of the Sino-U.S. relationship concerning America is that Chinese businesses as a whole appear to be a lot less susceptible to the ups and downs of this relationship than their American counterparts.

According to estimates by Deutsche Bank AG, exports to the U.S account for less than a fifth of China’s total, while China’s overall industrial output has only a five percent exposure to the U.S. market.

“Chinese production serving the rest of the world is five times more important than the supply chain serving the U.S,” confirms Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong.

American consumers would have a hard time finding alternative chains of supply, should the trade ties to China continue to unravel. For example, Western competitors to Chinese companies sell their products at much higher prices, whereas competitors from Southeast Asia and Latin America lag far behind in technological and management capabilities. For these reasons, China remains the dominant global supplier that cannot be easily displaced.

“China still has a large cost advantage due to economies of scale and is also well established in parts of the supply chain that need hard-to-get certification, including for food, drugs, medical devices and some transportation equipment,” according to Mary Lovely, a nonresident senior fellow at the Peterson Institute for International Economics in Washington. “Damage from the U.S. tariffs is bearable for China,” adds Lovely. “These tariffs are unilateral, and China still will supply the rest of the world.”

Considering the above-mentioned issues, it becomes plain why global investors are feeling a great deal of consternation about the erstwhile thespian’s melodramatic approach to global commerce.

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