China Strategy a Muddle, Experts Say

The trade war that President Donald Trump began with China 16 months ago is creating pain for businesses, but there's a deeper strategic mistake to consider, said Matthew Goodman, senior vice president for Asian economics at the Center for Strategic and International Studies. Goodman, who was speaking during the first session in a Congressional Trade Series on Nov. 19, said, “I still don't know what the basic strategic goal is here." He said he didn't know whether the administration wants to get structural changes to China's economy, as it claims, or whether it wants to reduce the bilateral trade deficit, or to contain China's rise.

Goodman -- and other panelists speaking during Capitol Hill to a large crowd of congressional staffers, a few Congress members, and attendees from advocacy groups -- says the Section 301 report on China was accurate on the diagnosis of the problems in the Chinese commercial relationship. But, he said, "Do we try to make the patient better? Do we try to kill the patient, or cut off an arm or a leg?"

Rep. Stephanie Murphy, D-Fla., organized the panel, and she asked Goodman if the tariffs are hurting China's economy, as intended, and if that is forcing China to make real structural changes. Goodman said it is having an impact in China -- the tariffs are expected to cause a .8 percent decline in China's GDP, double the impact to the U.S. economy -- but that the tariffs aren't the main reason the Chinese economy is suffering. China has its own internal challenges, such as an aging workforce, environmental degradation, and the need to shift from an export-dominated economy to a consumer-based economy.

Goodman said that at first, he was surprised that Chinese officials returned to negotiations after the breakdown in May, but he believes now that the damage to Chinese companies caused by the tariffs is the reason they're still talking.

"It's enough to make them want to put this behind them," Goodman said. However, he later said that China will not be returning to the reforms it seemed ready to do in April. "They're not going to do those things," he said, and the experience of the trade war makes them more likely to subsidize high tech firms, a core strategy in Made in China 2025. "They're more determined than ever to have indigenous innovation," he said.

Goodman's not sure a 'Phase 1' deal -- which is oriented around major purchases of U.S. agriculture, and some intellectual property gains -- is going to come together.

Over at the White House, Trump was asked why the Phase 1 deal hasn't been revealed, since he said there was an agreement in principle a month ago. He replied, "Look, China is going to have to make a deal that I like. If they don’t, that’s it. Okay? I'm very happy with China right now. They're paying us billions and billions. We'll be over a hundred billion dollars in the not-too-distant future. China -- they never gave us 10 cents.

"And I've told you: I gave a lot of money to the farmers. I'm helping people that need help because China is paying us tremendous -- and they're paying for it. Those tariffs are not paid by us. Those tariffs are paid because they're devaluing their currency and pouring cash into their economy. Their supply chains are being killed. And I said it: They had their worst year in 57 years.

"Now, with that being said, I have a good relationship with China. We'll see what happens, but I'm very happy right now. If we don’t make a deal with China, I'll just raise the tariffs even higher. "

Goodman said even if there is a Phase 1 deal, there won't be anything more ambitious. "I don't think there will be a Phase 2 in this administration, at least," he said, though he thinks there could be reforms to China's state-owned enterprises in five or 10 years, once they see the approach's drawbacks for their own growth.

In a brief interview after the panel, Murphy said that the Trump administration has made a dramatic departure from normal foreign policy and trade relations. She added, "I would look forward to a time when the U.S. returned to more predictable and standard trade and foreign policy."

Darci Vetter, a former chief agricultural negotiator in the Office of the U.S. Trade Representative, said U.S. agriculture -- as well as their Brazilian competitors -- have more problems with barriers to trade based on non-scientific phytosanitary standards than they do with subsidies to Chinese farmers. Vetter hailed the announcement that China would open its market to American poultry, but said the real test will be if they keep the market open "the next time there's animal disease."

Vetter said the claim that China will be buying $50 billion in agricultural goods is confusing. "Is that annually? Over two years? Is that annually for a number of years?" She asked whether USTR would be checking the volume of purchases quarterly, ready to hike tariffs if the purchases aren't large enough.

The most that U.S. farmers ever sold to China was $24 billion. To double that, China would have to buy only from the U.S. in certain commodities. "That seems to me to be focusing in the wrong place," she said. "It would be saying: 'Don't behave like a market economy.'"