U.S. Enters Long Game on China Trade as Allies, Markets Fret

After squeezing them for trade concessions, the U.S. looks to rally allies against Chinese trade policy. It could be slow going.

Commerce Secretary Wilbur Ross arrives to the Diaoyutai State Guesthouse to attend a meeting with Chinese Vice Premier Liu He in Beijing on June 3.
AP Photo/Andy Wong, Pool
Oct. 11, 2018, 8 p.m.

The U.S. is seeking to form a united front with other major economies against Chinese trade practices, but there are self-imposed headwinds toward a resolution.

President Trump took the stage in Erie, Pennsylvania on Wednesday night in part to boost his administration’s trade policies ahead of the November midterms, claiming victory on renegotiating the North American Free Trade Agreement and his confrontation with China on issues such as trade subsidies and intellectual-property rules.

“The era of economic surrender is over,” Trump said during the rally in the former steel-manufacturing hub. “America is not being taken advantage of anymore. America is respected again.”

Half a world away in Bali, Indonesia, the world’s central bankers had a different take. International Monetary Fund Managing Director Christine Lagarde urged China and the U.S. during a meeting of global finance leaders to de-escalate the tit-for-tat trade conflict, saying it could depress markets up and down global supply chains. The Dow Jones industrial average plummeted more than 800 points Wednesday, one of the largest single-day drops this year, and nearly 550 points more Thursday amid concerns over trade and rising U.S. interest rates.

“It is a fact that the trade decisions that we are seeing, particularly the tariff decisions that have been made, are having an impact and are clearly eroding confidence in many corners of the world,” Lagarde told CNBC early Thursday.

The United States’ bare-knuckle trade strategy produced results with Canada and Mexico on renegotiating NAFTA, now the U.S.-Mexico-Canada Agreement, but it’s unclear if the same tack will work on China, analysts say. That means trade negotiators could be in for a long, difficult slog.

“There’s no question that China has been softened up a bit,” Edward Alden, a senior fellow at the Council on Foreign Relations, said. “Their markets have taken a hit, there’s some sign of foreign investors rethinking their operations in China. The Chinese are eager to negotiate, the question is whether the Trump administration is going to overreach.”

The U.S. has so far levied tariffs on about $250 billion in Chinese goods, and on Jan. 1 those tariffs will rise from 10 percent to 25 percent. The administration is also preparing tariffs on another $200 billion in Chinese-made products, and the broader tariffs on steel and aluminum imports—even for Canada and Mexico, despite reworking their trade agreement—are still in place.

Trump did score a win in the reworked North American trade deal, which includes a clause requiring member countries to notify each other if they enter into trade talks with a “nonmarket” economy—a reference to China—and allows member countries to weigh in. The Chinese embassy in Canada said the provision amounts to veto power for the U.S. on trade deals between China and USMCA members, calling it “dishonest behavior.”

Commerce Secretary Wilbur Ross told Reuters last week that the provision is meant to close “loopholes” in Chinese trade agreements that propped up the its trade, subsidy, and intellectual-property practices.

But it has also helped keep trade talks—and broader diplomatic negotiations—with China frosty.

Secretary of State Mike Pompeo traded barbs with his Chinese counterpart, Foreign Minister Wang Yi, on Monday in Beijing, with Yi accusing the U.S. of “ceaselessly elevating” trade tensions. Pompeo said the two countries had a “fundamental disagreement” on trade. Both remarks are light compared to Trump’s trade rhetoric, but in the diplomatic sphere they stand out as harsh.

Trump responded to Pompeo’s exchange on Tuesday, telling reporters at the White House that China is “just trying to get me a message.”

“But those messages don't work,” Trump said, according to pool reports. “They don’t work. But no, I think they treated him with great respect, actually. You know, they had meetings besides just the news conference. And I think they treated him with great respect.”

Trump said that he planned to levy the additional tariffs on $200 billion in Chinese goods if negotiations drag on and Beijing continues implementing retaliatory tariffs. Trump added that he doesn’t believe China was ready to make a trade deal.

Larry Kudlow, director of the U.S. National Economic Council, told Bloomberg TV last week that Trump may meet with Chinese President Xi Jinping at the G-20 summit in November in Buenos Aires. In Bali, Treasury Secretary Steven Mnuchin met with Chinese central bank governor Yi Gang early Thursday to discuss “relevant economic and financial issues,” the bank said in a brief statement.

The Trump administration has been pushing other countries to help bring China to the table on terms favorable to the United States and its allies. The U.S., Japan, and the European Union said last month they were considering possible measures against certain Chinese practices, including cybertheft, forced technology transfer, and dumping.

“We’re moving to what I characterize as a trade coalition of the willing to confront China,” Kudlow said during an event last week hosted by the Economic Club of Washington. “We are talking to the European Union again. We are talking to Japan again.”

Alden said there is concern among U.S. trade allies over Chinese practices, but not much support for U.S. tactics to deal with them, particularly with the use of tariffs.

“So there’s support for ends, but strong opposition to the means,” he said.

Canada declined to invite the U.S. to a summit of “like-minded” nations in late October to discuss reforming the World Trade Organization. Trump has criticized and threatened to withdraw from the global trade body, saying it costs U.S. jobs, and in his Erie speech called it “perhaps the only deal worse than NAFTA.”

“I think Canada figures rightly that if the U.S. were included in the discussions at this point it would just torpedo them,” Alden said.

Carla A. Hills, who served as U.S. trade representative from 1989 to 1993 and led the NAFTA negotiations, said a better approach for the Trump administration would have been to confront China without antagonizing allies with the steel and aluminum tariffs, which the U.S. implemented using a controversial national security provision. Those tariffs have instead pitted the U.S. and its key trading partners against one another in the WTO.

“If we had all 10 or 12 governments opposite China and what was at issue was whether trade could continue with all those—because China is very trade oriented—I think that you could have developed a plan: What are you going to do, when are you going to do it, when will it be completed, and that kind of thing,” Hills said. “But instead we have attacked our allies, and so actually we have a WTO case where we have China and the EU against us.”

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