The United States has legitimate complaints against Chinese trade and technology transfer practice, but the Trump Administration’s ineptitude threatens to turn what should be a tough negotiation into a trade war. An unclear chain of command and mixed signals about US policy demands have led to a breakdown in China’s efforts to negotiate a mutually acceptable deal with Washington through low-profile diplomacy, because the Chinese side can’t tell which Administration officials are authorized to speak for the Administration, according to Chinese sources familiar with the events.
Confusion about who’s in charge in Washington also plague the tri-partite negotiations over the NAFTA treaty with Mexico and Canada. US, as well as Mexican government officials, had expected that meetings in Washington on April 6 would lead to an agreement in principle before President Trump left for Latin America.
After hours of talks last Friday with US Trade Representative Robert Lighthizer, though, Mexico’s Economy Minister Ildefonso Guajardo and Canada’s Foreign Minister Chrystia Freeland had nothing to report. Reuters reports that a lack of clarity over a US demand to raise the North American content of vehicles imported under NAFTA was a stumbling block.
The Trump team meanwhile has sent contradictory signals on an almost daily basis, with Treasury Secretary Steve Mnuchin and Economic Advisor Larry Kudlow pointing to a negotiated settlement while the President threatens escalation of punitive trade measures. World stock markets whipsawed all week in response.
Confusion in the Trump team reflects a deeper confusion in US policy, which has two quite different goals. One is to constrain China to eliminate manifestly unfair trade practices, of which the most egregious is the forced transfer of technology by American companies seeking access to the Chinese market.
A second is to forestall the “Made in China 2025” plan to replace high-tech imports with local production – an unprecedented demand, for it proposes to penalize China for future rather than past behavior. Yet another is the president’s determination to reduce the trade deficit itself, which is arithmetically impossible for the time being. The United States cannot finance a trillion-dollar US budget deficit without borrowing from foreigners, and foreigners cannot lend the United States the money to finance a trillion-dollar budget deficit without selling more goods and services to the United States.
The fact that China often plays dirty has very little to do with the magnitude of the US balance on goods and services, or current account. Americans save less than the citizens of any other industrial country. The less they save, the more they buy from foreign countries. Countries as a whole save by selling goods and services to other countries and saving the difference. Countries with rapidly-aging populations (like all of East Asia as well as Germany) tend to save more, and do so by exporting more than they import.
US savings as a share of household disposable income have plunged to barely 2%, around the all-time low. That means that the US trade deficit will rise, especially because the US has a massive deficit financing requirement in part due to Trump’s tax cuts.
American households will save about $400 billion during 2018 at present rates; even if they put every penny of their savings into Treasury securities, the US government would still have to raise another $600 billion or so. The Federal Reserve has stopped buying US government bonds through so-called quantitative easing, and commercial banks have stopped buying government bonds because their own cost of funds is almost as high as the yield on five-year Treasury securities.
Corporations might buy some government bonds, but not enough to make a difference. So the US will have to borrow several hundred billion dollars from foreigners. Foreigners now hold about $6.2 trillion of US Treasury securities, and the total will have to rise during 2018 and 2019.
Where do foreigners get the dollars with which to buy US Treasury securities? By selling goods and services to the US.
Apparently, no-one has explained to the US president that he can have one of two things, but not both: a budget that cuts taxes while maintaining entitlement spending, and a lower trade deficit. There is, of course, a way to lower the trade deficit (but not the budget deficit), and that is to have a recession. If Americans lose income and stop investing they will buy less from foreigners and the trade deficit will fall. That’s not what Trump wants, of course, although he might get it in the aftermath of a trade war.
Because the dollar is the world’s reserve currency, America is able to borrow in order to spend. The US Congress apparently believes that America’s borrowing power is infinite because it continues to spend and to program future spending that depends on foreign borrowing – which is the same as saying that it depends on increasing US trade deficits.
If the US administration demands that the rest of the world (starting with China) shrink its trade surplus with the United States, it will also hasten the arrival of the day when the US no longer can borrow at low interest rates to pay for entitlement programs. Americans will wake up and find themselves poorer and less secure, the way the British did after the Sterling crises of the 1960s.
I have argued on several occasions in this space and in articles for The Journal of American Affairs that the only path out of the savings and trade-deficit trap lies through innovation. America is (or at least used to be) far better than China at innovation. America’s complaints about Chinese theft of intellectual property are justified, but they amount to closing the barn door after the dragon has left. In 2003, for example, Huawei admitted to stealing code from Cisco. Today Huawei is manufacturing chips for mobile phones that compete with Qualcomm’s. Huawei’s R&D budget has jumped to $14 billion in 2017 from only $4 billion in 2011.
What America has to fear most is not Chinese theft of existing technologies, but Chinese invention and commercialization of new technologies. If China surpasses America in the deployment of new technologies, no protection in the world will save the United States from decline.
It seems to me one sensible step that does not cost anyone anything would be to eliminate any and all regulatory impediments to invention and commerciallization of new technologies here in the U.S. I would start with a 50 year moratorium on all new laws and regulations, period.
America can remain a vibrant and important nation, but to do that, it must revert to being a normal country and not try to continue to be the greatest empire in the history of the world. The problem is that their priorities are all screwed up, as they continue to be fixated with pouring money into the black hole of military-intelligence spending. And their politicians are a crusty bunch of parasites under the thumb of Aipac and other vested interests. For heaven’s sake, rebuild your infrastructure, invest in your people, bring back the middle class and stop spreading chaos around the world. It’s good for you and good for the world, no?
The notion that the US’s legitimate complaints against Chinese trade practices and outright theft can be resolved through negotiations is wishful thinking in the extreme. The real choice for America is to accept the status quo or to radically alter it. So perhaps right now we are in a ‘damn the torpedoes, full speed ahead’ mode. And I can see that everyone here is betting on the POTUS to make a hash of things. Still I will take the other side on that proposition. Those who continue to short the POTUS’s actions have been upended often.
There is, of course, another way to lower US government spending rather than cutting "entitlement programs" (i.e., unemployment insurance, Medicaid, etc.), that David Goldman forgot to mention: making significant cuts in the huge military budget, which is larger than that of all other countries in the world put together.
Exactly.
You may be right, but don’t count America out just yet. America has remarkable resilience and capacity to adapt to innovations. I see this more as a tortoise vs. hare race, where the hare is asleep and the tortoise is passing it. The hare may wake up.
Oh c’mon. Huawei was caught red-handed with Cisco code, bus and all, and admitted it. Chinese companies steal American technology with abandon. That is a legitimate grievance. But, as I said, it is not the cause of the trade deficit.
It’s a reference to an old joke: "The Polish [or substitute another ethnicity] Godfather makes you an offer you can’t understand."
All dominate nations eventually delcine and are eclipsed, some, perhaps many, seem to think that once America has been religated to history something just, fair, equitable, benevolent, etc. will ascend; maybe but history is not encouraging in this regard, my guess is new boss same game
It’s nice to, once in a while, being able to agree with Spengler. But Trump is not capable of understanding what you said…
As David Goldman certainly recalls, in the early 1980s, when Japan had surged in R&D on microprocessors and taken the lead from the US, a consortium of American firms pooled their R&D budgets on joint patents that created a several generation technological leap and restored American leadership in the field. Republican budget fixation has been a factor for a long time in blocking adequate R&D investment by relying too much on private sector spending, which tends to be "product oriented" for perfectly understandable reasons. How can we boost the innovation factor and overcome these restraints? Is there a means for encouraging private sector investment and can it be better coordinated with Federal investments outside of the defense sector? The solution is correct, and it does require a blueprint and a clear public policy debate to make it happen. Seems that we need to get beyond the fixation on bilateral trade imbalances and focus on what will really make a difference in the longterm.
Better education and sheer ambition to succeed since 1978 mean that Chinese invention and commercialization of new technologies WILL exceed that of any country, including that of the USA. Short of inflicting a disastrous war on China and the world, America will have to accept No.2 status. Its productive industries are already much inferior compared to China’s.
The victorious strategist builds the Petro Yuan
Agree.
If you listen to U.S. rhetoric long enough masses actually believe it but it’s wrong. U.S. rhetoric about "unfair" trade practices is just that and could not be substantiated. WTO already shows that China’s policies and practices were compliant with international treaties. The other flaw is that there is no forced technology transfer by China. U.S. companies have been operating without any forced transfer.
It is too late for america already. Just look at commercial drone market. The Chinese dominate it. Any US company that try to compete, fail because they make poor product
One has not seen any offer yet only threats.
This is the only article you have written that I agree with you. Trumps incompetence will only hasten US down fall. Chinese will go fully on the trade war and American will see their economy shrink (loose jobs and purchasing power). Interest rates will go up sharply this year. You can’t stop this fast moving train called China!!
The head line doesn’t sound correct. It should be something like The US could not come up with any concrete offer. There is no offer on the table.
Like what the author said the US could only compete by investing in the future. Gun boat diplomacy can’t make America great again . The other is don’t mess around in other countries affairs and get bogged down through endless and meaningless wars.
The US is still the world number one power. This should be used for the benefits of all humanity. Respect, which is the ultimate power must be earn. The US could be the beacon of hope on the hill for all. Hopefully.
"The victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory." (Sun Tsu/ The Art of War)