An Urban's Rural View

Farmers and ranchers got some good news recently in the reports on the U.S.-China trade negotiations in Beijing. (https://www.wsj.com/…) The two sides have yet to strike a deal but they made enough progress that they added a day to their schedule in hopes of making more. Emerging from three intensive days together, both sides sounded optimistic.

Before the trade war, China was the biggest export market for American agricultural products. If the negotiators can reach agreement by the March 1 deadline, it could be again. If, as seems likely, the agreement includes specific Chinese promises to buy American agricultural products, China could become an even bigger market for American soybeans and, as we learned at the DTN Ag Summit recently, possibly even for American meat.(https://www.dtnpf.com/…)

American producers of goods both manufactured and agricultural have to hope agreement can be reached, then, because China is not a market they want to be excluded from. A rich, mature economy like America's will not be able to absorb all the fruits of our producers' rising productivity -- Americans by and large are already well-fed -- and that will be even more true if we put the brakes on population growth by sharply limiting immigration. American producers increasingly need export markets.

In the long run, China remains one of the most promising. With 1.4 billion people and an average annual household income only a quarter to a fifth of America's (https://www.stlouisfed.org/…), China has plenty of room to grow. It is likely to continue to increase its consumption of practically everything. It's not a market we want competitors from other countries to dominate.

The Chinese seem eager to end the trade war, in part because their domestic economy has been slowing. The trade war with the U.S. has cut into their exports, but that's not the only negative factor at work. Another big one is financial mismanagement, with debt building up and precious capital being misallocated to unproductive state-owned enterprises.

According to a leading China economist, Nick Lardy of the Peterson Institute for International Economics, whom some readers will remember as a DTN Summit keynote speaker a few years ago, the private sector now represents 70% of China's economy. Nevertheless, as Lardy points out in his latest book, state-owned enterprises get 83% of the loans in 2016. (https://www.washingtonpost.com/…)

It wasn't always that way. In 2013, the private sector got 57%. Why the change? Blame Xi Jinping, China's president. Before he took power in 2012, China was liberalizing its economy. Xi has gradually reversed that. He has worked to concentrate more power, economic and political, in the state and Communist Party (and himself) while constricting individual freedom. Under Xi, the era of moving from totalitarian Communism to an autocracy and mixed economy has ended.

This course change is bad news for American farmers and ranchers -- indeed, really, for anyone anywhere who has to deal with China. It guarantees that China's economy will grow slower and import less than it would have under a less state-controlled system. Just as importantly, it makes China harder for other countries to negotiate with.

The current talks between the U.S. and China exemplify this problem. For it's not just more Chinese purchases of American goods that U.S. negotiators are demanding. They are, quite rightly, asking China to stop playing the economic game by China's state-capitalism rules, under which it's natural for China to subsidize government-owned enterprises and extort technology from foreigners as the price of doing business. The U.S. trade team is demanding that China play by free-market rules. In essence, it's demanding China make fundamental changes in its economic-management system.

That would be a hard concession for any government to give foreigners. It's like asking them to kowtow. It would be especially hard for a Chinese government that believes its political control depends on exercising economic control.

That's why, despite the progress made in Beijing, there's reason to doubt that the U.S. negotiators can get their way, and thus reason to worry that agreement won't be reached. If it is reached, if the Chinese bow and make promises to change their rules, there will be skepticism about whether they will make good on the promises.

Ironically, what we're asking the Chinese government to do would be better for their economy than staying their current statist course. But they don't get it, or at least Xi Jinping, the most powerful Chinese ruler since Mao, doesn't get it.

The Trump administration deserves credit for pressing China to make these changes. It would have done so from a much stronger position, though, if the president hadn't pulled the U.S. out of the Trans-Pacific Partnership on his first day in office. The 12-nation TPP embodied American and world rules even more strongly than the World Trade Organization. We would be saying to China, "If you want to join and trade with these countries on TPP's preferential terms, you need to obey TPP rules."

Even with help from our friends, America's ability to change China would hardly be guaranteed. It would, though, be much strengthened. In our upcoming negotiations with China's neighbor Japan, the Japanese may well push us to re-embrace some of the TPP's language and rules, if not rejoin the pact. If they do, President Trump might want to swallow his pride and admit TPP was not the worst agreement ever negotiated after all. Dealing with China, he will need all the help he can get.

Urban Lehner can be reached at urbanize@gmail.com

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