US-China Trade: Get Ready for a Rough Ride

It’s been over a month since Donald Trump assumed office as the president of the United States. Given that his time on the campaign trail featured some harsh rhetoric against China – specifically, a pledge to crack down on its trade violations – his presidency has seen a calm start to U.S.-China relations. However, recent indications are that the Trump administration is preparing to unveil some new trade initiatives – including making good on campaign promises to target China for “unfair” trade practices.

As a candidate, Trump’s favorite message was that the United States had been taken advantage of by other countries during the past decades of globalization. China, in Trump’s mind, was a major offender; he famously accused China of “raping” the United States. “We're like the piggybank that's being robbed… [W]e can't continue to allow China to rape our country. And that's what they're doing. It's the greatest theft in the history of the world," Trump told a rally in May 2016.

Pronouncements like those, along with threats to label China a currency manipulator on “day one” of his presidency and slap heavy tariffs on Chinese exports to the United States, caused consternation in both China and the United States. Trump only deepened those fears when naming Peter Navarro, author of hawkish books such as Death by China, as the head of the newly created National Trade Council. As Politico put it in a recent article calling Navarro the “most dangerous man” in Trump’s orbit, Navarro “seems to think that every one of Chinese economic successes comes at U.S. expense.” An economic confrontation seemed all but certain.

Despite those fears, however, the early days of the Trump administration were relatively benign for China. The biggest economic move the new president made – withdrawing from the Trans-Pacific Partnership trade deal – was a net positive for Beijing, as China was not one of the 12 nations included in that deal. And clearly Trump did not direct the Treasury Department to label China a currency manipulator on his first day in office, as he (and many candidates before him) had promised.

However, that doesn’t mean Beijing can breathe easy. As February drew to a close, Trump’s economic team was just getting put into place. Treasury Secretary Steven Mnuchin wasn’t confirmed until February 13 and Commerce Secretary-designee Wilbur Ross faced a final confirmation vote on February 27 (just as this issue goes to press). With that in mind, the administration is likely only now getting ready to actually move forward with new trade policies. 

A recent report in the Wall Street Journal, for example, indicated that the Trump administration was gearing up to take action on the currency issue. Rather than officially slapping China with the “currency manipulator” label, however, the Commerce Department would declare currency devaluation as the equivalent of a government subsidy. This would allow individual U.S. companies to bring anti-subsidy complaints against China (or other foreign countries).

That would be a less controversial step than pegging China with the dreaded “currency manipulator” label, but would likely result in China taking retaliatory trade action against U.S. companies, as it did several times in response to trade challenges brought by the Obama administration. Under Obama, the United States brought 15 cases against China at the World Trade Organization, including complaints about Chinese duties on U.S. automobiles, subsidies for agriculture, and dumping of aluminum. Often, China responded with punitive measures of its own, such as slapping tariffs on U.S. chicken products after the Obama administration put its own tariffs on Chinese tires.

In addition to the near certainty of retaliation, there’s also the fact that most economists and even U.S. business leaders argue that China has not actively sought to devalue its currency in years. A Chinese Foreign Ministry spokesperson predictably denied that China is a currency manipulator. “China does not deliberately devalue the RMB in order to gain an export edge,” Geng Shuang told reporters who had asked about the Trump administration’s reported plan. “…[W]e hope that relevant parties view issues related to the RMB exchange rate in an objective light.”

Trump, meanwhile, indicated that he would “talk to [the Chinese] first” before moving to label them a currency manipulator. That set the stage for Chinese experts to predict more conventional trade negotiations between Beijing and the new administration. But Trump, who prides himself on making only “good deals,” might have notably different standards for what is an acceptable compromise from China. While Trump has – for now – backed away from an earlier comment that even the sacrosanct “one China” policy was up for negotiations if China didn’t play ball on trade and other issues, the threat remains.

Aside from the currency manipulation question, another option gaining traction with the U.S. government and businesses alike is a push for reciprocity – demanding that U.S. companies have the same amount of market access in China as Chinese companies do in the United States. Such an approach could range from government-to-government negotiations to open sectors in China where foreign investment is strictly limited (such as the healthcare or entertainment industries) to slapping mirroring restrictions on Chinese investments in the United States – something certain to spark retaliatory measures from Beijing.

This is a sensitive year for China, with the 19th Party Congress looming in the fall. A massive economic slowdown due to an aggressive U.S. trade policy, is something the Communist Party can ill afford. At the same time, however, China’s official narrative of national “rejuvenation” fits easily into a well-practiced victim complex – that is, powers envious of China’s rise (read: the United States) will do anything possible to stop it. As commentators like long-time China watcher Bill Bishop have pointed out, if the Trump administration does pointedly target China for trade violations, it could cost China economically but, somewhat counterintuitively, buoy the current leadership politically. In Bishop’s words:

Any significant moves by the U.S. to push back on trade… could feed the “foreigners, especially the Americans, are trying to contain China and keep us down” narrative and be used to underscore… the importance of a strong, unified leadership in face of an “enemy.”

At the same time, Trump also likely sees political gains to be made by “getting tough” on China. The promise to bring back American manufacturing and other blue-collar jobs by cracking down on trade violators like China was a central part of Trump’s successful electoral message; it will be very difficult for him to back away from those pledges. In the United States, too, there’s a significant part of the population that sees China as “the enemy,” particularly in economic terms. That makes it politically advantageous, at least in the short term, to implement new restrictions on trade with China (the long-term economic consequences of a tit-for-tat trade battle, of course, will eventually change that calculus).

While U.S.-China relations may have seen a quiet month on the trade front, that’s likely just the calm before the storm. Trump and his team have made no secret of their intention to come out swinging on trade issues; the only questions are how hard they will look to hit and how prepared they are for the inevitable counterpunch.