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The Art of a China Deal: Reciprocity and the Trump Pacific Partnership

By James McGregor

James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years.

https://www.linkedin.com/in/jlmcgregor

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By his own admission, President Donald J. Trump is a brilliant businessman, a master negotiator, an exceptional deal maker, somebody who always wins. When it comes to China, he is prepared to do just that—win. “I’ve read hundreds of books about China over the decades,” Trump wrote in his 1987 bestseller The Art of a Deal. “I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.” If that’s the case, Trump should know that he is about to be seriously outsmarted by a country that has been spectacularly outmaneuvering American policymakers and businesses for at least a decade.

Dealing with President Trump will not be a novelty for Chinese leaders. The country is littered with eccentric and egotistical real estate billionaires. In fact, Trump has much in common with China’s leaders. The Chinese leadership is also outwardly bold and confident but inwardly paranoid and insecure. Like Trump, they create and repeat “alternative facts” until they are considered truths. Like Trump, they allow no insult or slight to escape retribution. Unlike Trump’s, Chinese retaliation is not a 6:00 a.m. Twitter tantrum but a well-studied and carefully targeted response that will deliver maximum punishment.

Trump will also discover that China is ahead in the “great” game. China has focused on “Making China Great Again” for the past four decades. While China concentrates on the industries needed for 2030 and beyond, Trump’s China trade policies are better suited for the 1950s. China is concentrating on dominating advanced manufacturing, with its semiconductors and robotics, as well as aerospace, biopharma, new materials, advanced medical devices, and beyond. Trump’s trade team is saddled with a back-to-the-future agenda that concentrates on preserving heavy industry through tariff barriers and currency complaints.

By killing the Trans-Pacific Partnership (TPP) without an alternative plan or vision, Trump has left our Asian allies twisting in the wind, with little choice but to sign on to the Chinese value proposition of providing money, infrastructure, and market access in return for settling in under China’s economic and security umbrella.

If Trump now plows ahead with trade remedies focused on yesterday’s problems, as his threatened 45 percent tariffs on Chinese exports and focus on Chinese currency are, American business and their global supply chains and sales channels will be hammered.

Instead, Trump should focus on three things in resetting U.S.-China trade and business relations. First, all discussions and agreements should be based on true reciprocity. We can’t do it there, you can’t do it here. For example, non-tariff barriers have squeezed foreign insurance companies into less than 6 percent of the Chinese market. So cash rich Chinese insurers such as the Anbang Insurance Group are using the enormous wealth earned in their protected market to try to acquire insurers across the globe including Des Moines-based Fidelity & Guaranty Life.

Second, revive Section 301 of the Trade Act of 1974 as well as other trade enforcement tools that allow the president to impose retaliatory tariffs and other penalties when the U.S. believes trading partners are pursuing unfair policies. WTO rules prevent the U.S. from using these tools against fellow WTO members. Third, and perhaps most important, resurrect, rejigger, and rebrand the TPP. A revitalized and expanded Trump Pacific Partnership would demonstrate America’s desire to be partners with our Asian allies in their economic success.

Trump will need to thoroughly think through his China trade policy as U.S. multinationals present a ripe target for Chinese redress. China is often the largest or fastest—or both—growing market for U.S. companies in industries ranging from aviation to telecommunications to silicon chips to automobiles to food and agriculture. China’s creative retribution skills were on full display when the European Union imposed tariffs on Chinese solar panels a few years ago. China responded by going after Europe’s nearly $1 billion in wine exports to China. The solar panel dispute was quickly resolved.

More than 50 percent of Chinese exports are produced by foreign-funded factories. Foreign firms account for 70 percent of high-tech exports. And China was responsible for nearly 40 percent of global growth last year. So Trump’s plan for 45 percent tariffs on Chinese exports to the U.S. could knee-cap leading American companies and roil the U.S. stock market.

Three days before Trump took the oath of office, Chinese President Xi Jinping was effusively welcomed as the new champion of global stability at the World Economic Forum (WEF) in Davos. “In a world marked by great uncertainty and volatility, the international community is looking to China to continue its responsive and responsible leadership in providing all of us with confidence and stability,” WEF founder Klaus Schwab said in introducing Xi.

In his keynote speech, Xi warned that “no one will emerge as a winner in a trade war” and that the world’s leaders must “say no to protectionism.” The day after Xi’s WEF keynote, the American Chamber of Commerce in China released its annual member survey with 80 percent of respondents stating they feel less welcome in China and some 60 percent—citing extensive and accelerating protectionism—saying they have little or no confidence China will further open its markets in the next three years.

The George W. Bush and Barack Obama administrations were both focused on avoiding drama in their relations with China. Neither administration had a consistent, well-articulated China strategy. Instead, various agencies including The Departments of Commerce, State, Treasury, and Defense, the U.S. Trade Representative Office, and other agencies carried out individual agendas. This worked well for China, which specializes in playing the barbarians against each other and wearing them down through a mixture of feigned compliance to rules, distracting disinformation, belligerent defiance, and theatrical diplomacy. “The United States is being massively outmaneuvered and the government doesn’t even see it,” a former senior U.S. trade official told me about interactions with China.

When it comes to U.S.-China business, trade policies, and practices, the Chinese system seems to be working better for China than the American system is working for America right now. That is something that the Trump team has right.

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