The Challenge at Mar-a-Lago: Wooing China to Drop Its Tariffs

Beijing joined the WTO in 2001 on terms that no longer make sense for an industrial powerhouse.

By Bill Lane

               Photo: Agence France-Presse/Getty Images

There’s a Civil War story about a farmer who wakes up one morning to find his house wedged between large Yankee and Rebel armies. In an effort to extricate himself from the predicament, he puts on blue pants and a gray coat before walking outside under the white flag of truce. But he doesn’t get far. The Confederates shoot him below the waist while the Union troops shoot him above it.

That’s the risk of trying to split the difference—a lesson worth keeping in mind this week as President Trump meets China’s President Xi Jinping. Some of Mr. Trump’s supporters want him to restrict imports from China sharply. Yet many Americans fear that doing so may spark a trade war. So how to avoid putting on the blue pants and the gray coat?

The answer is economic growth. Presidents Trump and Xi, as the leaders of the world’s two largest economies, must certainly realize that robust growth at home would be the best answer to their respective critics. Better to coordinate policies to stimulate prosperity than to cause a confrontation and risk an economic downturn.

A central issue during the meeting this week will be America’s bilateral trade deficit with China of about $350 billion—more than half of the overall U.S. trade deficit. Whether one is a free trader, a managed trader or a protectionist, there is no denying that trade between the U.S. and China is out of balance. The average American spends 17 times as much on Chinese products as the other way around.

Economists come up with all sorts of benign-sounding reasons for this imbalance: China saves too much; the U.S. doesn’t save enough; Americans simply like to buy inexpensive stuff. Others suggest more sinister causes: currency manipulation, trade barriers or cheating. But regardless of whether the U.S.-China trade imbalance is economically sustainable, the 2016 election demonstrated that it isn’t politically sustainable.

That’s where the opportunity comes. President Trump has a chance to recenter America’s economic relationship with China not by the saber but through flattery and mutual respect.

Beijing joined the World Trade Organization in 2001, nearly two decades ago, on terms that made sense then. Since that time, however, no country has more enthusiastically embraced economic change. Mr. Trump encourages America to do big things, yet China has been practicing what he preaches—from the Three Gorges Dam to its network of high-speed trains. America’s top universities are full of the best and brightest Chinese students. These massive investments in infrastructure and education have made China dramatically more competitive.

But global trade rules haven’t changed. As an industrial powerhouse, China no longer needs to hide behind double-digit tariffs. In the old days, these weren’t considered a big deal because new rounds of negotiation under the General Agreement on Tariffs and Trade were held every decade or so to revise the rules. The expectation was that greater trade liberalization would be coming.

Today revising WTO rules is perceived as too difficult, so the world is stuck with an outdated framework. This particularly affects trade with the countries that have changed the most—China in particular. What’s surprising is that Beijing knows it, but has generally taken the attitude of “why change unless you have to?”

President Trump should point out that China has options. It can further open its markets to the U.S. via bilateral, regional, multilateral or, best of all, unilateral action. But Beijing has to act with a sense of urgency, as the status quo is no longer politically acceptable.

President Xi made eloquent comments at January’s economic summit in Davos about the virtues of free trade. President Trump insists he is a free-trader, too, albeit with caveats. Maybe this is the right time for the two leaders to cut a deal to slash Chinese trade barriers. This would give Chinese consumers increased access to U.S. products, while Mr. Trump could claim a victory for American exporters and their workers. And the whole world would benefit as the U.S. and China—the twin engines of global economic growth—start pushing once again in the same direction.

Mr. Lane is a retired director of global government affairs at Caterpillar Inc.

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