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US-China talks: Give Trump’s big splashy trade deal a chance

US companies that have suffered weaker demand and higher costs from the past year’s trade war are unlikely to welcome a final agreement based on no more than commitments to buy more farm produce and hydrocarbons.
You know that trade breakthrough we were all talking about a few days ago? It is not looking so close. Just three days after president Donald Trump reported “substantial progress” in talks with China, the man doing most of the talking was out pouring cold water. “Much still needs to be done”, US trade negotiator Robert Lighthizer told Congress Wednesday, and it is still in doubt whether the two sides can come to terms. Lighthizer’s refusal to bend in pursuit of a deal is admirable in its way. As we argued earlier this week, the US companies that have suffered weaker demand and higher costs from the past year’s trade war are unlikely to welcome a final agreement based on no more than commitments to buy more farm produce and hydrocarbons.
At the same time, perhaps he has something to learn from the Trump administration’s approach to North Korea. Negotiators from Washington are no longer demanding Pyongyang make a full accounting of its nuclear programs, NBC News reported Thursday citing current and former senior US officials. That flexibility looks alarming in a nuclear-proliferation context. On trade, however, a Trumpian deal may be just what the world needs. Consider the previous trade pacts agreed by this administration, with Mexico, Canada and South Korea. In contrast to the ambition of the North American Free Trade Agreement or Trans-Pacific Partnership, each is essentially a modest adjustment to existing policies. China is a whole different ball game, as Lighthizer told the House of Representatives:
What the president wants is an agreement that, number one, is enforceable—but that changes the pattern of practice of forced technology transfer, intellectual property protection, large industrial policy subsidies; and then a whole variety of specific impediments to trade, and unfair practices in the area of agriculture, in the area of services. What we want is fair trade. That requires structural change, and it has to be enforceable”.
Removal of forced technology transfers in manufacturing is a possibility that Premier Li Keqiang has raised and intellectual property reform is a pet project of president Xi Jinping, so movement on those areas ought to be quite achievable with the right combination of carrots and sticks. Even agriculture has potential, given China’s need to feed its growing population as cheaply as possible. The problems come with the other asks: industrial policy, services and enforceability.
There is no sign that China is rushing to reform the state’s role in the economy—quite the opposite. Bailouts of distressed debt seem overwhelmingly directed at state companies in strategic sectors, with local governments taking up the lion’s share of the dwindling supply of cash.
Removing impediments to services investment, meanwhile, opens an immense can of worms. Some areas, such as retail and hotels, are already reasonably accessible to foreign companies, while finance is being gradually liberalised. Perhaps there is a chance to crack the door ajar on aviation and logistics too, although it is hard to see much of an opportunity for American businesses there.
Beyond that, though, it is all but impossible to imagine the current Chinese government loosening foreign investment rules in closed sectors such as government services, healthcare and education—not to mention the media, information and technology industries where Beijing sees control as an existential issue. The same goes for enforceability. A deal that compels performance is essentially one where punitive tariffs aren’t removed until there is proof that China is upholding its side of the agreement, or at the very least, are kept suspended and ready to be reimposed at any moment. That is hardly going to inspire confidence that the current trade tensions are buried.
Lighthizer’s list of asks is a worthwhile one, and a China that reformed in the way he is pushing would probably be better both for its people and for the global economy. But if Beijing is set on resisting those changes, the trade negotiator is banging his head against a wall, and in the meantime, the tensions risk sucking about 0.4 percentage points from long-term global GDP, according to the IMF. If president Trump wants to put his name on a big, splashy agreement that ultimately just returns things to the status quo, let him have it. It is certainly better than tilting at windmills around Beijing’s industrial policy, or hoping to get a black-letter agreement to end industrial espionage that China doesn’t even admit is happening.
To quote Trump: The Art of the Deal, “I also protect myself by being flexible. I never get too attached to one deal or one approach”. Lighthizer could do worse than follow one of his boss’s oldest pieces of advice.