The U.S. and China together account for one-third of global economic output, so there is a lot at stake as President Donald Trump meets with his Chinese counterpart Xi Jinping, not least the fate of the world economy over the next few years.
And it is precisely the magnitude of the stakes involved that has led some observers to assume that both countries will play it safe and focus on the areas of the relationship that are “win-win” relative to the areas that are more likely to produce conflict.
But there is no guarantee that this will happen. In fact, Trump may have already dealt himself a poor hand thanks to his past rhetoric on trade, which has heightened the political risk that he faces in negotiating with Xi. Perhaps more worryingly, Trump’s focus on achieving short-term victories could also tip the balance against the U.S.
At the end of the day the two countries not only drive the world economy but also rely critically on one another, a fact that should moderate the decisions of these two strong-willed leaders. In fact, my research (with fellow economists Giovanni Peri and Gianmarco Ottaviano) has highlighted the economic risks of miscalculating on trade deals, particularly those with developing countries.
A tricky trade balance
Trump has a difficult political balancing act to maintain.
On the one hand, 85 percent of Republicans believe that trade has cost more U.S. jobs than it has created. This group will presumably expect results in raising barriers to U.S. imports, particularly those from China. In fact, there is perhaps no other issue more salient to Trump’s base than the perceived harm done to U.S. workers due to international trade, and Trump has been unequivocal in his promises to scale back trade agreements, from NAFTA to the now-rejected Trans-Pacific Partnership.
On the other hand, Trump’s more moderate advisers, such as Gary Cohn, head of the National Economic Council, have likely cautioned him that trade is ultimately good for economic growth. And any disruption would be bad both for the U.S. and for Trump’s political future.
Having repeatedly (and unrealistically) promised at least 4 percent to 5 percent annual economic growth, Trump must be careful not to inadvertently push the economy into a ditch by abandoning the free trade principles that have made the U.S. one of the richest countries in the world.
Who will ‘win’?
Another potential pitfall for Trump is that the search for a perceived “victory” in the negotiations – something the president typically prizes above all else – is actually more likely to favor Xi.
This is because Xi’s grip on power is such that he does not need headline-grabbing wins to the extent that Trump does. Instead, he can try to extract more substantive concessions behind the scenes. This suggests that a possible outcome is that the status quo will be effectively maintained. For instance, Xi may be able to walk away with a win by simply avoiding a trade war while also obtaining an implicit promise that the U.S. will look the other way on human rights issues and Chinese regional expansion.
This isn’t to say that Trump does not have leverage – his campaign promise to raise import tariffs on China to 45 percent would be a serious blow to the Chinese economy. And of course the U.S. can always flex its political and military strength in opposition to Chinese interests. But perhaps most unnerving for the Chinese is Trump’s unpredictability which, despite its downsides, keeps his counterparts off balance.
The concern is that Trump may use his leverage in order to obtain “tweetable” victories that do not amount to much. For instance, a likely outcome is that Trump obtains promises of future investments in the U.S. of several billions of dollars. In fact, Chinese and U.S. commentators have suggested that these investments may come as part of a larger U.S. infrastructure program. However, as with other investments that Trump has taken credit for, most of these would be made in any case (China invested $45 billion in the U.S. last year) and so come at little cost to the Chinese.
A misguided focus on trade deficits
But as with the imposition of trade barriers, Chinese investments do not come without political risk. In this case, it is the Trump administration’s obsession with the trade deficit in goods as the key metric by which it views success or failure on trade that will make life harder.
The trade deficit with China – US$347 billion in 2016 – is simply the difference between U.S. exports to China and U.S. imports from China, and this value fluctuates for a variety of reasons. When the U.S. runs a trade deficit it means that, on net, the U.S. is sending dollars to China in exchange for Chinese goods. As a simple fact of accounting, those dollars must then end up back in the U.S. as investments in U.S. assets. So investments in U.S. assets are the flip side of a trade deficit.
As a result, inviting greater Chinese investment in U.S. assets will necessarily increase the trade deficit with China. While most economists believe that the trade deficit is a poor measure of the success of a country in the world economy, National Trade Council Director Peter Navarro has repeatedly pressed the case for trade deficits as a proxy for the overall health of the U.S. economy, as has Trump.
And so, however inadvisable it may be to focus on the trade deficit, Trump is sure to pay a political price if it were to grow over the course of his tenure.
Forging a bond before the clashes ahead
In the end, the most consequential outcome of Xi’s visit may be the extent to which a bond is forged between the two leaders.
This is because Trump tends to personalize policy choices, and many of the most important issues on which the U.S. and China will need to find common ground will arise over the next few months.
For instance, although Trump has not yet formally labeled China as a currency manipulator (which he promised to do on “day one”), later in the spring the Treasury Department will publish its analysis of international currencies and may choose to place that label on China. While the Chinese would likely simply ignore such a designation, it would require the U.S. to take some form of punitive action if negotiations with China did not resolve the dispute.
But, of course, this may be small beer compared with the more pressing geopolitical issues that will be in play. These include dealing with North Korea, whether or not to confront internal repression within China and the threat of Chinese regional expansion. It would not be surprising to find that American cooperation on these fronts comes with a price tag denominated in U.S. jobs.
Finally, it is worth noting that reducing the level of trade with China will do little to help U.S. workers. This is something that nearly all economists agree on, but that politicians rarely embrace. This is because while the economy can be easily cured of a proliferation of trade agreements by simply withdrawing from, or rewriting, those accords, there is no easy cure for the proliferation of new technologies, which are the real culprits in the decline of U.S. industrial production.
And so, since trade is a policy lever that can be easily pulled, politicians inevitably rush to do so.