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Trump’s Phase One Trade Deal Shows He Envies Xi’s State-Control of China’s Economy

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Dec 27, 2019, 22:50 UTC

Agricultural Imports In Nantong, China
A truck dumps soybean meal in a dockyard in Nantong in east China’s Jiangsu province. BARCROFT MEDIA VIA GETTY IMAGES

Something glaring has been lost in the media’s headlines and in the carefully detailed analysis by many of my fellow trade economists in the wake of the White House announcement in December 2019 that China and the U.S. have come to an agreement on “Phase One” of a hoped for grand trade détente between the world’s two largest economies. – Trump and China

It is the recognition that under the Trump Administration, American policy toward international commerce has pivoted markedly toward a greater role for the U.S. government, rather than businesses, to engage directly in commercial cross-border transactions.

 The centerpiece and seemingly the most tangible component of the Phase One agreement—at least as much as anyone can tell, since as 2019 comes to a close neither side has yet to issue a formal text—is a commitment by the Chinese government, through its state owned enterprises, to procure perhaps as much as $50bn worth of agricultural products from the U.S. over several years. Today In: Leadership

The irony that the President Trump’s trade team is relying heavily on state-to-state procurement transactions to ease trade frictions has not been lost on Xi Jinping according to friends of mine very well placed in Beijing.

Indeed, that the U.S. has become more like China rather than the other way around—at least in terms of respecting the WTO rules-of-the road regarding disciplines on non-market economies—is exactly what Mr. Xi has been hoping for as his Christmas gift all year long.  

As long as Trump stays in power, Xi can count on this as the gift that will keep on giving. Given imperiled economy Mr. Xi oversees—if not feverishly trying to resuscitate—Trump’s gift is welcome indeed.

There is a plausible reason why Mr. Xi understands very well what drives the U.S. president.  Trump emulates Mr. Xi’s ability to give the state the paramount role in the functioning of the economy.

The same can be said for Trump’s simpatico rapport with Russia’s Vladimir Putin, Turkey’s Recep Tayyip Erdoğan, and even North Korea’s Kim Jong-un, among other strongmen today across the globe.

Beyond the arranged agricultural deals with China, other actions reflect Trump’s longing for state control of the U.S. economy.  Here are three that the president or his team have been contemplating or have begun to execute during his term in office so far.

The first is the starkest example. It was Trump’s attempt to order U.S. firms to leave China. Recall his Tweet earlier in 2019: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” 

Second, Trump and his Treasury Secretary, Steven Mnuchin, have been working with allies in Congress to force a de-listing of Chinese firms from U.S. stock exchanges. 

Ironically, portfolio investments in these businesses by American individuals and institutions might help those groups attain greater oversight of—or at least a better window on—the activities and performance of those Chinese firms, something one would think would be of value to the U.S. government.

And, third, Mr. Trump’s Secretary of Education, Betsy Devos, has launched a new program to penalize U.S. universities that inadequately disclose funding received from certain foreign governments. 

These are resources that significantly help finance the operations of U.S. universities’ overseas campuses (which are highly profitable activities); fund cutting edge research activities taking place within U.S. universities by U.S. scholars; and plug a hole in cash-strapped U.S. universities, especially publicly funded schools.

These three initiatives are a few of the components of Mr. Trump’s overarching drive for a forced “decoupling” of the U.S. from China. If such a decoupling were successful, it would be the ultimate example of Trump’s exercise of a state-directed economy.

Fortunately, as I have written earlier in this space, any meaningful form of artificial decoupling is not only unwise public policy but it simply will not take root easily in a global economy whose supply chains, including the assembly of various components sourced from numerous geographies into final products, are truly multinational.

In short, no matter how forceful a government’s policy might be to try and sharply re-orient the current worldwide constellation of the location of production and consumption, as well as both the flows of technological advances and their geographic diffusion, it will unlikely counter in the short-run powerful forces engendered by inertia.

Why do I say that? 

First, enacting and implementing new U.S. policies to bring about changes in taxes, tariffs and wage rates—among other factors—in order to alter global supply chains will not be easy tasks to accomplish. Even if the same party controlled both the executive and legislative branches, do not underestimate the power of U.S. businesses, labor and other interest groups to weigh in heavily.    

Second, corporations with large fixed investments abroad will—for good reasons—not reconfigure their supply chain configurations on a dime. They will want to hedge their bets that any policy changes are durable.

Third, countries compete against each other to attract investment. A move by the U.S. to, say, make China a less desirable location for American firms to operate, will beget compensatory changes not only by Beijing but other countries in the region, for example, the ASEAN states. The world marketplace operates like a dynamic game.  

Finally, the notion that the world will operate according to bifurcated technology standards for very long—say a duopoly of Western and Chinese technological regimes—is hard to digest. 

The power of global economies of scale and scope will likely disrupt any semblance of a stable competitive equilibrium in this regard. One does not have think back very long to remember the race between Betamax, VHS, and DVDs.         

Mr. Trump surely envies Mr. Xi’s sweeping governmental powers and his hold over the Chinese economy, which—for better or worse—has become the “world’s factory” of today.  

In an ever-changing global marketplace, however, nothing guarantees such a configuration will not migrate to elsewhere on the globe in a few decades time.  Indeed, this could be hastened by Xi’s reluctance to reform a moribund economic system.

In this regard, Trump would do well to recognize that strongmen economies do come to end, and often their demise is not a pretty sight, particularly for those at the very top.

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