EC Little Resolution In The Week Ahead

Trade is another issue that must go to the brink.  What White House Economic Adviser called the '"varsity team" of Mnuchin and Lighthizer are in Beijing next week to continue high-level trade talks ahead of the early March deadline.  Reports suggest that while China is willing to talk about a wider range of US demands, its position has not changed much from the start  It is willing to buy more US goods and reduce or eliminate the trade imbalance.  It has already begun opening up more of its markets to foreign businesses.  It has adopted more stringent protections of intellectual property rights. 

China cannot commit to the kind of structural reforms the US demands. It is pursued policies in direct contradiction of the IMF and Washington Consensus, and it has literally lifted hundreds of millions of people out of poverty. The US wants the Chinese state to withdraw from the economy.  While there is an intuitive appeal but the closer it is examined, the less insightful it becomes.  

Imagine Chinese officials demand that the US government withdraws from the housing market, where through its ownership of Fannie Mae and Freddie Mac, it nationalized America's mortgage lending. Imagine Chinese officials complained when the US injected capital into all the large banks whether they asked for it or not. 

If the size of the state is measured as expenditures as a percentage of GDP than it is the US state that is the outlier for how small it is rather than the size of the Chinese state.  Many critics see the US government as having encroached on the markets to an unprecedented extent, and now the US is insisting the Chinese state withdraws.  It is an unrealistic demand that is tantamount to unilateral disarmament.  

Moreover, the US has this knack for turning a necessity into a universal virtue.  In the 1980s, when the free-trade Administration thought it knew better than the markets, it coordinated intervention in the foreign exchange market. It has now successfully championed the G7 and G20 to formally recognize and endorse markets determining exchange rates. 

It was reported last week that Trump and Xi are unlikely to meet by the end of the month.  Schedule conflicts were cited, but it is understood as confirmed Kudlow's assessment that the two sides are still far apart.  In addition to substantive issues, a key criticism of past agreements by many in the Trump Administration lies with a lack of sufficiently robust enforcement. "Trust but verify" make more sense when you can see the deployment of missiles with satellites. It is more infinitely more difficult with these issues. Also,  US officials have been critical of existing judication and conflict resolution mechanisms, but have not yet offered a politically realistic alternative.   

The US Administrations rhetoric does not match its action.  After lambasting NAFTA as the worst agreement ever, the Trump Administration has submitted a new treaty for approval that is very similar to the older one, modernized with what had been negotiated under TPP (Trans-Pacific Partnership, from which Trump withdrew) and more robust domestic content requirements. The trade agreement with South Korea is not too dissimilar either.

If such a pattern prevails, it will imply that after all the drama, when everything is said and done, the US-China relationship is not going to change very much.  China will reduce the bilateral trade imbalance with the US.  Leave aside the fact that this managed trade may be challenged by others at the WTO.  It is in China's interest to de-claw American protectionism.  In the recent past, the protectionists argued China was taking unfair advantage by maintaining an undervalued exchange rate. Now many models show the yuan near fair value. 

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Read more by Marc on his site Marc to Market.

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Gary Anderson 10 months ago Contributor's comment

One of your best, Marc. The insanity of getting state owned enterprises to pull out of the Chinese economy, when their participation has lifted millions of Chinese out of poverty, is pure American insanity. The US is trying to manage capacity utilization in China. That is truly invasive. Meanwhile Huawei is not permitted to sell to the west. China really should go on its own, with the rest of the world. after Trump slaps massive tariffs on Europe, that union will see who is really making trouble for the world. Us!

Kurt Benson 10 months ago Member's comment

Yes, excellent article!