COMMENTARY: Market access the true pot of gold in China

Antagonism with China will lead to a trade war, while something more subtle would bring U.S. manufacturers true benefit    There was a revealing profile of President Donald Trump’s primary economic advisor Peter Navarro this week in Foreign Policy.
   It described a man deeply confident in his view of China-U.S. trade relations and also deeply doubted by economists and China experts. In the profile, there’s a revealing quote early on: “As soon as you have cheating by one country, the model breaks down.”
   Navarro was referring to the way he believes China has gamed the United States since its accession to the World Trade Organization (WTO) in 2001. That China has suppressed its currency to benefit its exports and that it has not provided market access to U.S. manufacturers equivalent to what Chinese producers enjoy in the United States.
   Which begs a few questions:

   • Is China still a developing economy?
   • Was it the United States’ goal, within the confines of the WTO and its trade relationship with China, to convince China to gradually move toward a more truly open market?
   • Has the United States not benefitted from its arrangement with China in the meantime?

   The first question is the most inscrutable. China would like the world to believe it is still developing, and with a massive proportion of its population still living on low incomes, you could credibly say it is. On the other hand, China appears to look like a developed country in terms of its sheer economic size and its political clout, both regionally and globally.
   The second question is also tricky and probably just as unanswerable. Surely, the goal of the WTO and its members when bringing China into the fold was to harmonize its economy with its trading partners, from both a tariff and non-tariff barrier perspective. The bigger question is whether that goal has changed in the 16 years since. Have the WTO and (more pertinent to this discussion) the United States recalibrated their expectations of China?

The positive effect of the Trump administration’s vigorous scrutiny of our trading model is that it’s a chance to focus on areas of the U.S.-China relationship that haven’t received proper attention.

   The third question is probably the easiest to answer, and the one where Navarro disagrees more diametrically with most economists. Outsourced production and trade with China has largely benefitted the U.S. economy, even if those benefits have not been uniformly spread. Or to put it another way, some sections of the U.S. economy have benefitted tremendously, while others have been negatively affected.
   The positive effect of the Trump administration’s vigorous scrutiny of our trading model is that it’s a chance to focus on areas of the U.S.-China relationship that haven’t received proper attention. But in this case, the path forward is not assessing huge, punitive tariffs on goods made in China. That would probably induce a trade war, would definitely impact the cost of consumer goods in the short term (a burden that would be disproportionately borne by those in lower income brackets) and wouldn’t solve the real underlying issues that afflict U.S.-China trade relations.
   The best path forward is using whatever leverage the United States has to get better access to China’s consumers, both industrial and commercial. That accomplishes three things:

   • It keeps trade channels open and unobstructed
   • It doesn’t decimate the existing (and already beleaguered) retail sector, and all the jobs directly and indirectly tied to that industry
   • It provides growth opportunity for existing U.S. manufacturers

Why not focus on maximizing the export opportunities to China for companies that already exist before we rip a hole in the world’s most precarious, yet important trade relationship?

   The last is probably the most resonant for this administration. Growing the sales of existing U.S. producers through broader export opportunities expands the manufacturing sector more quickly (and realistically) than expecting whole new manufacturing clusters to sprout up and replace those in China. In other words, why not focus on maximizing the export opportunities to China for companies that already exist before we rip a hole in the world’s most precarious, yet important trade relationship?
   China has to realize that its protection of markets and its direct and indirect support for state-owned entities that distort global market prices and production capacity must eventually come to an end. China wants to straddle the line between developed economy and developing economy to suit its various needs.
   Until this point, calls for China to step up and declare itself developed have focused on its contributions to global issues like climate change and wars. But there’s a more micro aspect to this – first China must act like a developed country in bilateral relations with its major trading partners.
   As the world’s second biggest economy, it cannot continue to shelter its manufacturing sector against legitimate foreign competition. It can’t continue to use the WTO dispute resolution process as a means to not comply with WTO commitments. Simply put, it needs to provide better market access to U.S.-made products.
   Ironically, the Trans-Pacific Partnership (TPP), a 12-nation Pacific Rim free trade agreement that was scuttled by the Trump administration in January, would have put a lot of pressure on China to act more responsibly with regard to market access. It would have provided the United States a bulwark in the Asia-Pacific region.
   The problem is that there seems to be little nuance in Navarro’s (and the Trump administration’s) point of view on trade deals and trade relationships. They have seemingly conflated the TPP with U.S.-China trade relations, when they’re really opposite sides of the same coin.

China has to realize that its protection of markets, its direct and indirect support for state-owned entities that distort global market prices and production capacity must eventually come to an end.

   Navarro is not short on hubris – he referred to himself in the Foreign Policy article as Paul Revere and not the alarmist he is often portrayed as by economists and China experts. But his simplistic view of trade includes a theory that Americans would rather have a job than cheap products to buy, when most research shows they like both, and that imports are not quite as large of a job killer as he suggests they are.
   All that aside, Trump and Navarro have a tremendous opportunity at their fingertips, one that (credit where credit’s due) they actually created through calling out China as no other administration has in recent times. But the question is whether they will go down the path of antagonizing China into a face-saving trade war, or whether they can compel China to do something more substantive and less sexy. To choose a developing or developed identity and allow U.S. manufacturers broader access to its rapidly growing middle class.
   In the Foreign Policy piece, Navarro had a pretty pertinent quote when it comes to market access: “Alibaba Cloud will have a monopoly of the Chinese market even as it can freely enter our market. We’d be allowing a Chinese company to come into the United States, even as China is pushing out Amazon.”
   If this is the aim of Navarro’s China strategy – to push for equal market access for U.S. companies – that will be a hallmark of this administration. If the goal is to antagonize China into a trade war, they might find China is more developed than anybody truly realized after all.