The damage caused by US President Donald Trump’s trade fight with China has spread farther and faster than many expected. Factories in China and the US have seen orders slump. American farmers are hurting. A collapse in Chinese demand for iPhones knocked nearly $75 billion off Apple’s market cap in a single day. Slower growth just prompted China’s central bank to ease monetary policy, and, despite last week’s encouraging news on US jobs, the Fed is having second thoughts about its plan to normalize interest rates.
The US-China trade quarrel is deeply implicated in this turmoil. As the two sides resume talks this week to end the standoff, both ought to see there’s a deal to be had -- and should help each other seize it, even if it’s less than perfect.
China’s economy is slowing for many reasons, not least the government’s campaign to scale back lending. Regardless, the prescription for restoring growth hasn’t changed. China’s leaders need to revive private-sector confidence and investment in the short term and support innovation and higher-end manufacturing in the long term, all without adding to a dangerously large pile of debt. Externally, they need to restore faith in the global trading system and preserve the supply chains companies have established on the mainland.
These priorities aren’t inconsistent with the government’s stated policies -- and, please note, given a slight shift of emphasis, they can be tailored to address US concerns as well.
Beijing agrees that market forces should play a greater role in allocating capital, which argues for cutting subsidies and pruning the other advantages state-owned enterprises currently enjoy, just as Washington demands. China also needs to maintain a steady flow of foreign investment, technology and expertise -- which will require opening more sectors of the economy and protecting intellectual property more effectively. Scaling back wasteful industrial policies such as the “Made in China 2025” program would help to promote innovation. Adhering to the spirit and letter of its World Trade Organization obligations would help restore confidence in the global trading regime.
The US isn’t wrong to maintain a poker face. Talks are just beginning, and China has been promising bold reforms since at least 2013 without following through. Under Chinese President Xi Jinping, state control over the economy has increased rather than decreased. China’s recent offers to treat foreign and private Chinese companies the same as state-owned enterprises, and to ban the forced transfer of technology to Chinese partners, are welcome but deserve a measure of skepticism. The US has good reason to want such promises to be backed with specific commitments on enforcement.
At the same time, it would be counterproductive for the US to press for outright capitulation, or to spin any emerging compromise as a crushing Chinese defeat. Both sides ought to grant each other a face-saving exit from the mess they’ve made of their bilateral economic relations, recognizing that they’re bound together more than either government might wish to admit.
In the end, as the recent economic news suggests, the two countries are likely to prosper together or fail together. A worsening slump in Chinese demand would hurt many more US companies than Apple, as Council of Economic Advisers Chairman Kevin Hassett acknowledged last week. Washington has as much reason as Beijing to strike a deal before March 1, the deadline the US has set for imposing a new round of tariffs.
In getting to yes, the US needs to understand that no plausible deal will settle all of its complaints. That’s partly because some of its thinking -- such as the overarching goal of balanced bilateral trade that Trump has often seemed to advocate -- makes no economic sense. American companies and the US government will continue to face hacking attacks from shadowy Chinese groups no matter what happens. The US military will have to counter the build-up of Chinese capabilities in the South China Sea and elsewhere. The Chinese government, no less than the US government, will find ways to support favored industries and lessen its reliance on foreign technology.
None of this need rule out a compromise that promotes mutually beneficial trade between the two countries. And always remember that, in most cases, the best way for the US to address the problems posed by China’s economic and geopolitical ambitions is through intelligent domestic policy, not by raising trade barriers.
The Trump administration needs to bolster the nation’s defenses, broadly defined -- including by tightening scrutiny of Chinese buyouts of American high-tech firms. It needs to favor immigration reform, to add to the country’s human capital. Above all, the dislocation that trade and technology impose on any healthy, dynamic economy should be confronted with policies that strengthen safety nets and promote economic and geographical mobility -- not by policies that see dynamism as the problem.
With the right domestic policies, the US needn’t fear that its open liberal system can’t hold its own against China’s autocratic one. Right now, the biggest threat to America’s continuing success is the damage this US-China quarrel over trade might cause if it gets out of hand. The sooner that threat is lifted, the better.
Editorial by Bloomberg