Are the U.S. and China headed for a trade war? Many analysts and investors think it quite possible. Top Chinese officials have seen fit to underline the mutual harm it would bring. As it is, we are lucky to have a tenuous thaw given then-President-elect Trump’s wayward thought experiment on tabling the “one China” policy alongside trade issues.
From here on, there is much less margin for error. President Trump now commands the levers of state power, not just a Twitter megaphone, and he faces growing pressure from domestic supporters for aggressive follow-through on his “America First” agenda. The wrong move could yield dire consequences for both countries, the Asia-Pacific region, and far beyond.
To avoid the worst, and to find actual leverage in engaging China, the president must fight a battle of a different sort. He must face down the disconnect between his stated objectives — “fairer” trade and U.S. jobs growth — and his actual policies for getting us there. A three-pronged approach can help him bridge that gap and keep his footing as he steps into the arena, in earnest.
First, use the principle of reciprocity as a springboard to a fuller, more coherent strategy. President Trump has underscored reciprocity in his recent trade overtures to Japan and Canada. The U.S. business community in China is warming to it, as well. It thus offers a potential starting point to fashion workable trade policy out of Trumpist ideas. But it is far from sufficient.
It is also, of course, a two-way street. It implies America is prepared not only to punish those who wrong it, but also to take its medicine when found to have erred. It does not, however, curb U.S. ability to vigorously dispute certain cases on their merits, or press for different rules in the future — quite the opposite.
The key is not to waver in recognizing the legitimacy of the institutions in which the rules are developed and enforced. Trade wars break out when the rules of the game are unclear or purposely undermined.
That brings us to the second imperative: Think bigger, on both process and substance.
Bilateral showdowns only get one so far. On balance the Trump administration will see major benefits if it keeps faith with the likes of the World Trade Organization and G-20. They provide the legal and political bedrock for international trade rules. Their value is often greatest in addressing the most complex issues. And they provide China the cover it normally prefers when accommodating critics.
Take currency practices. The administration is said to be considering general designation of currency manipulation as an unfair export subsidy. That resonates domestically, but it would be certain to get tied up in WTO disputes — some of which could lead to authorized retaliation against U.S. firms. And though most campaign rhetoric focused on China, the move could needlessly hurt cooperation with Germany and Japan, which the administration has also called out on currency practices.
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Meanwhile, all three of those countries have pledged against competitive devaluations under the G-20 umbrella in recent years. Germany, this year’s G-20 president, has pushed the group to reaffirm that commitment. Treasury Secretary Steven Mnuchin should be their lead advocate when G-20 finance ministers convene next week. Unfortunately, reports suggest the consensus there is eroding.
The Trump team must also expand its trade logic beyond the realm of traditional manufacturing, particularly bilateral trade balances in those sectors. America’s current and future competitive advantages lie higher up the value chain, and draw strength far beyond her geographic borders. Trade negotiations that fail to prioritize areas such as services, digital trade, and regulatory cooperation are leaving money on the table.
The administration seems partly pointed in the right direction here. It is rightly concerned about various Chinese tactics to acquire U.S. firms’ intellectual property — from outright theft, to onerous and ambiguous legal conditions for “cybersecurity” compliance and market access. This is the most important axis of the U.S.-China economic relationship. It could tilt either toward cooperation or conflict in the months ahead: In both countries, reforms to foreign investment and technology transfer regulations are high on the agenda for 2017.
In any case, oversight and enforcement will not suffice. The Trump team must get more serious about creating and broadening adoption of rules for digital trade, especially rules that govern cross-border data flows. It can bolster its position vis-à-vis China by adapting relevant provisions from the Trans-Pacific Partnership in any renegotiation of NAFTA.
Finally, the president must make a Rust Belt pivot. He urgently needs to reframe the jobs narrative with working-class voters in a way that creates the political space for a viable China strategy — and protects himself against vicious blowback at the polls and in the history books. In two and four years, not even the loudest chorus of “fake news” will obscure one simple truth: Growth in high-wage, traditional manufacturing jobs will fall far short of President Trump’s campaign promises.
If he acts fast, he can get ahead of that fate. His new refrain should be a demand that Congress substantially increase funds to train new labor force entrants, as well as dislocated workers, for next-generation jobs. That is what he should make central to making America great. The president’s own CEO advisory group last month told him of the need for more vocational training and apprenticeship initiatives. U.S. policymakers have given such programs short shrift for decades. President Trump does so at his peril.
We cannot expect U.S.-China trade relations to straddle the precipice much longer. Protectionist steps will not, as President Trump said in his inaugural speech, “lead to great prosperity and strength.” They are much more likely to take us over the edge.
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How Donald Trump Can Avoid a Trade War With China originally appeared on usnews.com
