An Urban's Rural View

The U.S. and China Near the Brink

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Has the moment of truth for U.S.-China relations arrived? The next few weeks could decide whether the world's two economic superpowers are on the path to some sort of accommodation, however uneasy, or on a fast track to a mini Cold War.

Not since before Richard Nixon arrived in China in 1972 have U.S.-China relations been as bad as they are today. It's tempting to blame President Donald Trump for that. There's no question that he's taken a far more confrontational approach to China than any of his recent predecessors. No previous president has hired an aide who co-authored a book titled "Death by China." Trump's trade adviser Peter Navarro has.

China, however, deserves at least as much if not more of the blame. Instead of further opening its economy to foreigners, it has in many ways gone backwards. Its foreign policy under President Xi Jinping has become truculent to the point of belligerence. At the same time, it has clamped down on even mild dissent domestically. With China changing for the worse, relations with China would have worsened no matter who was president of the U.S.

The U.S. under President Trump is demanding big changes in China's behavior and wielding a blunt instrument—heavy tariffs—to get China's attention. The president is scheduled to hold a critical meeting with Chinese president Xi Jinping later this month. Lower-level negotiators are laying the groundwork for the presidential powwow.

Having imposed special tariffs on $250 billion of Chinese imports, the administration is preparing to raise the levy to 25% from 10% on most of those goods starting January 1. It's also threatening to levy big tariffs on another $250 billion of China's exports at some point.

China has retaliated with tariffs on certain U.S. products, including a 25% duty on American soybeans. From being one of the biggest markets for American agricultural products, China is turning into a barren wasteland for U.S. ag exporters.

Though the U.S. is using tariffs as a lever, its demands are not just about trade. Vice President Mike Pence told a Washington Post columnist China must also make concessions on "several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries." (https://www.washingtonpost.com/…)

After receiving a formal list of American demands last May, Chinese negotiators identified 142 separate items. They said they'd negotiate on 122. (https://www.wsj.com/…)

Adding to the uncertainty over where things are headed, the Chinese aren't sure how much it will take to get the U.S. off their back. Their confusion is understandable. Even within the U.S. administration people aren't sure which side of the sharply divided Trump team will eventually win over the president.

Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow are taking the least hardline approach. They aren't satisfied with what the Chinese have been informally offering, but they see it as a basis for negotiation.

They've asked government agencies, including USDA, to weigh in on what acceptable concessions would look like. If their side prevails, the U.S. and China will agree to conduct formal trade talks and not increase tariffs further.

The Trump team's hardliners, led by Navarro and U.S. Trade Representative Robert Lighthizer, are convinced the Chinese won't make meaningful concessions. They're pushing to raise the tariffs and apply them to more Chinese products. If Trump agrees to formal talks, the hardliners will argue that existing tariffs should remain in place.

Trump's instincts lie with the hardliners. He has changed his mind about a lot of things over the years, but not about trade. For more than three decades he has consistently pushed for a tougher trade policy. He has consistently said he doesn't fear a trade war. (https://www.wsj.com/…)

It's interesting to note that more than once in recent weeks Trump has voiced optimism about reaching a deal, only to have the White House later tamp down public expectations. This makes observers wonder whether Trump, despite his hardline instincts, might ultimately back down and declare victory over Chinese offers that fall far short of his demands.

He has essentially done that with the North American Free Trade Agreement. He boasts that his U.S. Mexico Canada Agreement is a "wonderful new trade deal" even though independent observers say it's basically a NAFTA update -- an improvement, in some respects, though not a big one. (https://www.forbes.com/…)

But USMCA at least came close to addressing some of Trump's issues with NAFTA. It's hard to imagine the Chinese coming close to addressing some of the Trump team's demands.

The administration is, in essence, telling China to make wholesale changes in the way it manages its economy and deals with the world. There may not be enough tariffs in the world to get China to do that.

Even if Trump and Xi agree to move ahead with formal negotiations, there's no assurance those negotiations will bridge the gap. Meanwhile, the tariffs we've imposed on them and China's retaliatory tariffs on us could go from being temporary bargaining chips to permanent impediments to U.S.-China trade.

The next few weeks could be critical in determining whether that happens.

Urban Lehner can be reached at urbanize@gmail.com

(AG)

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JOHN DITTRICH
11/27/2018 | 11:38 AM CST
The administrations hard line on trade, particularly with China, is in many ways justified due to the US trade negotiating positions of the past 35 years which have focused solely on increasing trade volume with no other metric considered. There has been a clear disregard by US trade negotiators for impact on US trade balances, employment, or farm prices (by the loss of effective US farm policy tools that US trade negotiators rendered illegal). The current impasse with China is unlikely to disappear soon as Mr. Lehner accurately opines. The impasse should be a stark reminder to farmers and all thoughtful economists (not limited to agricultural economists) that sole dependence on free trade and "increased foreign markets" to solve agricultures historic supply and price problems are a fool's errand in the long term. The current price crisis in agriculture in conjunction with the trade war cries out for a re-examination of why farming is a fundamentally unique business. Either farmers can individually and collectively respond to market price signals to match supply with demand in a reasonable time frame or we cannot. If we cannot, (which should abundantly clear by now to all but the most intransigent analysts) than all trade policy or US farm policy that refuses to recognize this reality is doomed to be ineffective.