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John Mauldin
Chairman, Mauldin Economics |
European Threats
By John Mauldin
John Mauldin
Chairman, Mauldin Economics |
Washington may bluster but cannot stifle the Chinese economy
Even trying to do so risks strengthening the most anti-American elements in Beijing
Lawrence Summers
Presidents Xi Jinping of China and Donald Trump of the US at the G20 summit in Buenos Aires © Reuters
Presidents Xi Jinping and Donald Trump reached an agreement at the G20 meeting in Argentina at the weekend on a framework for trade dialogue that will delay the previously announced imposition of new American tariffs on January 1. While surely better than the alternative, this step does not address any of the fundamental tensions in the economic relationship between US and China.
Few observers doubt that China needs to make significant changes in areas such as intellectual property, rights of foreign investors and subsidies to state-owned companies if it is to meet international norms.
Antipathy towards Chinese economic practices is hardly confined to Mr Trump. Recent months have witnessed attacks on the existing economic relationship from officials of previous US administrations, noted China experts and the American businesses. It is fair to say there are no “panda huggers” left in Washington. When foreign governments get past their frustrations with Mr Trump, they too are frustrated with Chinese commercial practices.
Yet it is easy to sympathise with Chinese leaders who insist that China’s political system is for it to choose, and that economic negotiations should focus on the pragmatic identification of win-win opportunities, rather than on questions of ideology.
But, at the same time, it is hard to see how anyone with a modicum of historical knowledge could fail to be concerned by a combination of increased domestic repression, the centralisation of power in one man, rapidly increased military spending and rhetoric about enlarging China’s role in the world.
What the US requires is a viable strategy for addressing its legitimate grievances. Unfortunately neither rage nor proclamation constitutes such a strategy. A workable approach would involve feasible objectives clearly conveyed and supported by carrots and sticks, along with a willingness to define and accept success.
At the heart of the US’s problem in defining an economic strategy towards China is the following awkward fact. Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percentage point.
Equally, while some US companies might earn more profits operating in China and some job displacement in American manufacturing due to Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected US growth by even 0.1 per cent a year.
This is not to say that China is not a threat to the existing international order. And for the US to lose its position as the world’s largest economy, after a century of dominance, would be a seismic event. If, as is plausible though not certain, the US loses its lead over the next decade in information technology, artificial intelligence and biotech, the trauma will be magnified.
Can the US imagine a global system in 2050 in which its economy is half the size of the world’s largest? Even if we can imagine it, could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the US to be surpassed in economic scale, does it have the means to stop it? Can the US hold China down without inviting conflict?
These are very hard questions without obvious answers. But that is no excuse for ignoring them to focus only on short-run frustrations. China appears to be willing to accommodate the US on a specific trade issue as long as the US accepts its right to flourish and grow, knowing that sheer weight of numbers will make it the world’s largest economy before long.
That is a deal the US should take while it can. It can bluster but cannot, in a globalised economy, hold China down. Trying to do so risks strengthening the most anti-American elements in Beijing.
Mr Trump, for all his failings, has China’s attention on economic issues in a way that eluded his predecessors. The question is whether he will be able to use his leverage to accomplish something important. That will depend on his ability to convince the Chinese that the US is capable of taking yes for an answer, and on his willingness to go beyond small-bore commercialism. We can hope but should not hold our breath.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
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By Jon Sindreu
Trump’s War Against the WTO
If US President Donald Trump's talks with Chinese President Xi Jinping at the G20 summit in Buenos Aires do not go well, he could make good on his threat to increase US tariffs on a wide range of Chinese goods. But the stakes are even higher than that.
Simon Johnson
WASHINGTON, DC – At the G20 Summit in Argentina this weekend, US President Donald Trump will meet with Chinese President Xi Jinping to talk, above all, about trade. If their discussions do not go well, Trump could follow through on his threat to increase tariffs on a wide range of Chinese goods. But the stakes are even higher than that.
More broadly, Trump argues that the World Trade Organization has failed – for example, with regard to China – and that the United States should withdraw from the organization. Threatening to leave the WTO makes no sense even as a negotiating strategy, let alone as a policy, but it could still happen. The consequences for the US economy and for the world could be calamitous.
Ostensibly, Trump’s current priority in discussions with the Chinese is stronger protection for US patents and copyrights. On the face of it, this makes some sense: it is estimated that various forms of “theft” of intellectual property cost the US economy at least $225 billion (1% of GDP). Protecting intellectual property has long been an important part of US trade policy, as reflected, for example, in the Uruguay Round of negotiations that concluded more than 20 years ago. And there have been conspicuous cases of industrial espionage that allegedly involve Chinese companies (or perhaps some branch of the Chinese government) stealing trade secrets from firms with operations in the US.
But some of the most prominent American concerns about China’s intellectual-property regime today come from companies that want to invest in China, including the establishment of productive capacity there. China conditions these investments on technology transfer – a point highlighted by the US Trade Representative in a report released earlier this year, and now one of Trump’s talking points.
China’s insistence on technology transfer increases the short-term cost of doing business (for US and other foreign direct investors) and creates the threat of future competition from Chinese firms. Trump vows to “bring back” manufacturing jobs to the US. How does making it easier for American companies to manufacture and innovate in China contribute to fulfilling that promise?
Perhaps Trump’s agenda is the more conventional aspiration to “open markets” for US exports, and it is entirely possible that the Chinese will offer to buy more of some category of goods after the G20 summit. Trump likes headlines and most likely he would prefer a favorable news cycle or two, given the recent gyrations in financial markets. But such deals are typically meaningless – the goods were going to be bought anyway in some fashion.
A more likely outcome, at the summit or soon after, will be another lurch in US policy against the existing WTO framework. The US is already blocking the appointment of judges to a key WTO appeals court. If this continues, the WTO adjudication process will effectively grind to a halt, perhaps as soon as next year. This would be a major loss: the WTO’s dispute settlement process is essential to rules-based global trade. And, contrary to what Trump claims, the US wins far more often than it loses at the WTO. From 1995 to March 2017, the US prevailed in 91% of cases that it brought against other countries, according to data from the conservative Cato Institute.
But the US stands to lose a case brought against the Trump administration’s recently imposed tariffs on imported steel and aluminum, because they most likely violate WTO rules. So the White House now wants to undermine the WTO’s legitimacy and rescind US commitments to a multilateral trading system more broadly.
Could the US actually pull out of the WTO? Chad Bown and Douglas Irwin of the Peterson Institute for International Economics have written a careful analysis of the possibilities (I am also affiliated with PIIE, but I was not involved with this work). In their view, the power to do so more likely lies with Congress. But Trump certainly could issue a declaration of withdrawal, and then litigate his authority to implement it. Which way would the Supreme Court decide? It is very hard to predict.
And while that litigation continues, there would be great uncertainty about tariffs and much else. Bown and Irwin point out that, given how the system works, tariffs that are currently below 5%, on average, could jump to nearly 30%. There would naturally be retaliation in the form of higher tariffs imposed by America’s trading partners, which is exactly what happened after the steel and aluminum tariffs were imposed earlier this year.
There are definitely valid concerns about how China conducts trade, including what Pascal Lamy, a former WTO director-general, calls “opaque, trade-distorting subsidization of high-tech products.” But, as Lamy says, a more effective way to deal with this would be to strengthen WTO rules. Plenty of other countries would like to join the US in such an effort. Unfortunately, as in so many areas, Trump prefers unproductive confrontation to cooperation.
Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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