China seeks framework for November deal with Trump
David P. Goldman
Oct. 23, 2018
Ahead of a possible meeting next month between US President Donald Trump and his Chinese counterpart, Xi Jinping, the White House tempered any optimism that a trade truce with Beijing is imminent when top economic advisor Larry Kudlow accused China on Sunday of doing “nothing” to defuse trade tensions.
But some Chinese officials and government advisers recently emphasized that China will show patience in addressing American trade demands, postponing if necessary some of its plans to become self-sufficient in high-tech industry.
Raising per capita income from the present US$9,000 a year to mid-five figures over the next ten years or so is the country’s top priority, and the leadership views trade war with the United States as a distraction. China, they believe, is prepared to make concessions to American demands for changes in the country’s industrial policy without changing its long-term trajectory.
Several officials said they hoped that a meeting between Trump and Xi at the Group of Twenty summit in Argentina next month might break the ice. Earlier this year, China encouraged the US to give it a shopping list of items it might buy to reduce the bilateral trade deficit. To China’s consternation, the American side added the demand that China reduce subsidies to a manufacturing industry that competes with the United States.
Support for capital-intensive industry in China rarely takes the form of direct subsidies. Instead, it is embedded in the provision of credit and the control of the supply chain of China’s state-owned enterprises. It is not clear how to measure such subsidies, let alone eliminate them. Washington, to paraphrase an old joke, made Beijing an offer it can’t understand.
China’s “Made in China 2025” plan, which envisions a rapid expansion of domestic high tech industry, figures prominently in the US administration’s complaints about Chinese economic policy. US negotiators accuse China of using state subsidies to gain an unfair advantage against US competitors, quite apart from tariffs, non-trade barriers, theft of intellectual property and pressure on Western joint-venture partners to transfer technology.
China told the United States that it would buy whatever the United States wanted to sell in order to reduce the trade deficit, and is ready to work with Washington on improving intellectual property protection, but the American challenge to China’s economic model is a deal-breaker.
By backing off from the 2025 target, Chinese officials believe, Beijing can placate the US Administration, and give President Trump a coup in public relations while keeping its own industrial program intact. The government is exploring a number of ways to present such a deal.
Last week, a new government draft entitled “Made in China 2030” was released for discussion at government think tanks. Some government advisers mention the year 2035 rather than 2025 as a goal for achieving China’s high tech ambitions. The differences are largely verbal and have little bearing on actual policies.
Some advisers to the Chinese government view the trade war with the United States as the outcome of trends that have been in place since the 2008 financial crisis. China observes that economic liberalization has become less popular with voters in the United States and elsewhere. China’s trade policy has remained the same, and the trade deficit with the United States remains at very high levels. In addition, the United States now characterizes Russia and China as rivals challenging the United States and has begun a technological upgrade of its armed forces.
America’s punitive tariffs may prove a blessing in disguise for Chinese diplomacy, as China seeks to “win friends with neighbors who have been negatively affected by the American trade war,” according to one adviser. But other officials view the field of trade diplomacy as treacherous. The risk, some believe, is that America may lock in the largest industrial nations through bilateral trade deals, forcing China back to trading relationships with the developing world. That would lower the profitability of Chinese enterprises as well as Chinese growth.
A related concern is that the results of the Belt and Road Initiative (BRI), China’s flagship infrastructure program, have fallen short of expectations. A number of recipients of Chinese loans are pushing back against Chinese programs, most prominently Malaysia, which has suspended Chinese public investment. Poor execution and imperious behavior by Chinese negotiators have cost China a great deal of good will, in the view of some government analysts, and it may be necessary to slow the pace of BRI investments in order to improve the quality of investments.
China, to be sure, is doing its best to take advantage of global discomfort with America’s disdain for a world trading system that it helped to build. Diplomacy, though, isn’t China’s strength. It has a limited pool of negotiators with language skills and overseas experience. The path to prominence in China during the past generation has gone through regional Communist Party organizations or the military, rather than through involvement in foreign affairs. China was surprised by what one official called Trump’s “brutal” economic attack, and unsure of the outcome.
Westerners fail to understand that China still thinks of itself as a developing country, one economist emphasized. With per capita GDP of US$9,000, China isn’t even considered a middle-income developing nation. Although per capita GDP looks stronger on a Purchasing Power Parity basis, China wants to minimize risks to its domestic economic outlook.
It is still too early for China to act like a great power, one analyst said. The United States during the 19th century did not attempt to impose its will on other countries, he noted. Only after the Second World War did the United States act like a major power. China, he concluded, will have to take a more modest role in world affairs “until 2035, when it will be a much more powerful country.”
In the long term, though, China sees the pendulum of history swinging back to Asia. In 1840, before the Western industrial revolution overwhelmed Asian economies, the continent accounted for 60% of world manufacturing. Now Asia is back to 60% of world industrial production and will grow from there.
Chinese officials scoff at the Trump Administration’s claim that the superior performance of the US stock market shows that America is winning the trade war. “The finance sector has higher margins than the real economy,” said one academic. “The US is the largest financial power. You are printing money in return for wealth created by China. Since 2008, the finance sector has been playing a greater role in the US economy. No-one will win in this trade war. This will not be helpful for the development of the real economy in the US.”
China is uncertain about the immediate future, and the Communist Party is reluctant to put at risk the steady improvement in incomes that has kept its hold on power secure. But it is confident about China’s long-term economic direction and not particularly worried about whether China’s emergence as a superpower will occur in 2025, 2030, or 2035. Many Chinese strategists are willing to make substantive concessions or at least concessions that Washington can claim are substantive, in order to protect the domestic economy.
After numerous conversations with Chinese planners, I have the impression that the Communist Party will act swiftly to pre-empt any economic problems that might arise from the trade war and a possible reduction of exports. China has already loosened monetary policy and taken additional measures to encourage lending and is preparing a tax cut as well as increased infrastructure spending.
Internal government discussions emphasize China’s weak points and attempt to identify countermeasures that will correct them. To the extent that the US Administration is counting on China’s economic weakness to force concessions, it probably will be disappointed. Nonetheless, China will look for ways to conciliate the barbarian on its border and prepare for the not-too-distant day – perhaps in 2035 – when it will be the world’s largest economy by far.