Photo: Reuters/Jason Lee
Photo: Reuters/Jason Lee

China’s weighty economic ties with the US were the elephant in the room during President Donald Trump’s recent decision to reaffirm Washington’s One-China policy, says Nicholas R. Lardy. And Secretary of State Rex Tillerson had a lot to do with Trump’s decision, adds Lardy, one of America’s ranking China experts.

Trump pledged to honor the One-China policy in a lengthy February 9 phone call with Chinese President Xi Jinping, restoring a cornerstone of Sino-US ties that he had threatened to upend by accepting a phone call from Taiwan’s President Tsai Ing-wen soon after winning the US election.

However, Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, DC, warns that a trade war with China is still possible. He adds that Trump trade hardliner Peter Navarro’s stance toward Beijing would lead to such a trade war — damaging both countries.

The economist and author of numerous books on China also says Washington shouldn’t expect wholesale trade concessions from Beijing and that it’s uncertain whether a long-delayed US-China bilateral investment treaty will be signed by the administration.

Lardy spoke with Asia Times about the state of Sino-US relations in the wake of Trump’s phone call with Xi.

How much did the economic reality of US-China relations weigh on Trump’s decision to “walk back” the One-China policy?

I don’t know if (US-China economic relations) was the single most important factor – but I would judge that it was certainly a major factor. The involvement of Tillerson in changing the president’s approach certainly suggests that.

Tillerson met with the president before he made the call to Xi and he was in the room when the call was made. So I think his role was pretty decisive and Tillerson would have brought a bit of perspective to the issue.

How would you sum up Tillerson’s position on China?

I think he’s an engagement guy, but he’s pretty hawkish on some of his statements on security issues like the South China Sea.

Will Trump’s reversal on the One-China policy be viewed as weakness by China’s leadership and will this undercut his negotiations on various issues with Beijing?

This is a tough question to answer. I’m not inside the heads of the Chinese leaders. I think they’re more likely to consider this as a policy area that Mr Trump has never really focused on in the past, and that he’s learning the ropes.

Maybe (Trump’s) instincts were to forge a different path. But he’s reverted to what seven administrations have agreed to on the One-China policy being the foundation (of US-China ties). They may chalk up Trump’s about-face more to the learning curve than anything else.

Have the chances of a trade war between the US and China been lessened by signs that the White House is taking a more Kissinger-esque “globalized” approach as opposed to a protectionist stance on trade?

I don’t think the chances for a trade war have changed that much. Some things are still in process. If the (Trump administration does) the border-tax adjustment as part of the overall corporate tax reform, many countries will consider that to be pretty protectionist.

Trump also hasn’t outlined what he’s looking for in his renegotiation of Nafta [North American Free Trade Agreement] with Mexico. So I think the jury’s still out on what the approach is going to be on trade and globalization in general.

What do you think of Trump National Trade Council chief Peter Navarro’s stance and likely policies on trade with China?

I think his policies, as determined by what Navarro has said thus far, (would mean) that we would have a major trade war on our hands. US consumers would suffer. Both sides would lose economic growth. We are China’s largest export market and our exports to China are very large. We have a lot of money invested there. So I think a trade war would be a lose-lose for sure.

What trade concessions will China will be willing to offer if Trump pushes Beijing?

It depends on what form the “push” takes. The Chinese have certainly been very vigorous and protective of their interests in terms of trade, investment and liberalization.

I don’t think their closed sectors are going to be opened up all of a sudden in the short run. Their whole approach to trade issues has been fairly gradualistic — giving a little more access here, a little more access there. So I would not expect any wholesale trade concessions.

China’s markets are already fairly open on the trade side. Here’s one of the underlying problems: The (US) business community doesn’t think it’s that hard to sell into China. Our exports to China have been growing rapidly for years, it’s one of our largest export markets.

(But) the US business community is more concerned with restrictions on investment. China’s manufacturing sector is very open but some of the service sectors are very closed — financial services, for example — or telecommunications.

Is Trump interested in getting China to liberalize its foreign investment policies?

I’m not sure how interested Trump is in getting China to liberalize on investment. He seems to be in the frame of mind that when American businesses invest abroad — that means fewer jobs at home.

I don’t share that view and I don’t think it’s very well supported, but that is (Trump’s) perspective.

What does that mean for the possible signing of a US-China bilateral investment treaty (BIT)?

I don’t think we know what’s going to happen on that front. As far as I know, Mr Trump has never uttered the words, “US-China bilateral investment treaty.” I don’t know if he has been briefed on that. The BIT negotiations (between Washington and Beijing) have been going on for three years.

Has Trump taken a position on the BIT?

It’s quite conceivable that he’s never heard of it. If he has a view, he certainly never said anything about it during the presidential campaign.

One thing (that Trump) did say was that he likes bilateral agreements. He doesn’t like the Trans-Pacific Partnership because it’s multilateral— but he likes bilateral. At the same time, I don’t know how much pushing he would do on a bilateral investment treaty because he thinks it’s a job loser.

Do you think large-scale Chinese investment in the US is possible under Trump if it creates jobs for US workers, aids capital formation and business growth?

There’s been a huge increase in Chinese investment in the US over the last couple of years. There are job estimates out there on how many people work for Chinese companies in the US. It’s not a huge share, but it’s growing rapidly and it’s not insignificant.

Unfortunately, I think the attitude in parts of Congress and maybe, on the part of the president, is to be more suspicious of Chinese inbound investment. The approach that the White House seems to be taking is to look carefully at how more restrictions might be put on. The administration also seems to be looking at expanding the definition of “national security” (regarding Chinese investments) and maybe preclude all investments that enter our country that are made by Chinese state-owned industries.

What would China be willing to do on stateside investments?

The Chinese are willing. Most of the investment that’s coming into the US right now is from private companies. The question is will [the US] remain relatively open, or more closed?

A lot of people are talking about reciprocity. They say, ‘if our firm isn’t allowed to invest in X, Y and Z industries in China, then we should not allow Chinese to invest in those industries in the US.’ So reciprocity would definitely start closing down America.

Would Chinese investment in the US resemble what Japanese companies like Toyota did in the 1980s?

The situation is a little different than it was in the 1980s. Autos were a huge share of Japan’s exports to the US — so they could transplant a lot of these plants to the US. Our major imports from China are electronics, — like iPhones. Those products, I don’t believe, can easily be made in the US. The whole supply chain is geared for production of those products in Asia.

The ones making these products in China are not Chinese companies. They’re foreign companies. There’s Hon Hai, for example, iPhone maker Foxconn’s parent company. It’s not a Chinese company, it’s a Taiwanese company. Hon Hai’s president has said he might invest in the US. But he hasn’t done anything yet. It would be very difficult to shift production into the US.

Will China’s economy remain resilient in 2017 given continuing debt-to-GDP issues, capital outflows, falling forex reserves, trade and other problems?

I think the Chinese economy will do fairly well. [GDP growth] is going to be somewhere in the 6.5% range. People tend make a big deal out of one-tenth of a percentage point. I don’t think it really much matters. It may matter politically or domestically in China whether its 6% or 6.5%. But in the broader context, China will remain one of the fastest growing economies this year and contribute a lot to the expansion of global GDP.

The authorities are trying to slow down the growth of debt and lending, they are raising interest rates, they are increasing capital controls and are enforcing more vigorously the regulations that in the past they haven’t enforced. The fall in foreign exchange reserves has now dwindled to a fairly small amount, and it’s certainly not going to impose at this rate on economic growth.

5 replies on “Trouble with US-China trade war – both sides would lose”

Comments are closed.