Trump’s Approach To Trade Deficit Could Change The World

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Sandeep Gopalan Contributor
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Donald Trump’s jousting with China to reduce America’s massive trade deficit has the potential to fundamentally alter global trade at the expense of European and Asian citizens. Most observers have focussed on the dyadic relationship and missed the looming earthquake for the rest of the world.  Here’s how and why.

To recap, Trump expounded about the deficit last week: “We have been ripped off by China, an evacuation of wealth like no country has ever seen before, given to another country that’s rebuilt itself based on a lot of the money they’ve taken out of the United States, and that’s not going to happen anymore.” On Thursday, he declaimed that “China has become very spoiled. The European Union has become very spoiled.”

The president’s concerns stem from the $375.2 billion trade deficit with China in 2017 — a major electoral issue for voters.

In response, Chinese Vice Premier Liu He visited Washington last week for negotiations aimed at averting a trade war. China reportedly had a plan — since disavowed — to reduce the deficit by $200 billion. In the end, negotiations concluded without a firm target. Both sides issued a joint statement agreeing to take “effective measures to substantially reduce the United States trade deficit in goods with China … significantly increase purchases of United States goods and services …[especially] meaningful increases in United States agriculture and energy exports.”

Trump is unlikely to be swayed by anodyne statements and will exert pressure. Contrary to groupthink, it is possible for China to make a big dent in the deficit and build on Trump’s relationship with President Xi to the advantage of both countries. In addition to the economic benefits, a tactically coordinated reduction of the deficit can advance important foreign policy goals for both sides. Here’s how.

First, China imported $11.9 billion worth of crude oil from Iran. This could be switched to the U.S. following the termination of U.S. participation in the Joint Comprehensive Plan of Action (JCPOA). It is a win-win for both sides.

Next, any Chinese strategy to reduce its deficit with the U.S. will involve China switching its current imports from a trading partner to U.S. suppliers. In other words, the deficit cannot be reduced by growing the import pie but by slicing it differently. If the U.S. has to gain a larger slice of Chinese imports, naturally, one or more countries have to receive a smaller slice.

This is where things could get really awkward for the EU; the union could have the most to lose simply because it is one of China’s largest import partners. Given the divisions between the EU and Trump over Iran and other issues, the tactically poor European strategy to support Iran in defiance of Trump might come back to bite it. It provides Trump with a direct incentive to persuade the Chinese to switch imports from the EU in favor of American goods. Aside from any animus, switching away from the EU also offers the most immediate way for China to reduce the deficit because of the basket of goods it imports. American companies are the most direct competitors for European entities in the Chinese market. Therefore, any push to reduce the U.S.-China deficit will hurt European companies.

This picture becomes clear by analyzing China’s imports from the EU. In 2017, manufactured goods and chemicals comprised roughly 85 percent of China’s imports from the EU. Of this, machinery and vehicles made up 54 percent of all imports; the category included motor vehicles, motor vehicle parts, electrical apparatus, electronic tubes and valves, and other machinery. Another large category is aircraft and associated equipment.

China could source these from the U.S. and make a significant dent in the deficit at significant cost to the EU. For instance, aircraft purchases could be drastically skewed in favor of Boeing over Airbus; every new Chinese airplane could be a Boeing. Similarly, China’s imports of American automobiles can grow at European expense. Europe’s export of telecommunication equipment, of which China is one of its largest markets, could be severely impacted if there is a switch toward U.S. equipment. Together, a major shift in this basket of goods could exceed $100 billion, bringing the $200 billion target closer.

To be sure, even accounting for the $11.9 billion from transferred from Iran, it will not be easy to reduce the deficit by another $189.1 billion. U.S. companies may not have the production capacity to support Chinese purchases at current production levels. Trump, however, is likely to see under-capacity as a massive political opportunity. If China does switch away from Europe and commits to massive purchases of aircraft, industrial machinery and automobiles from the U.S., there will be major investments in new production facilities in the rust belt. This is Trump’s political base.

If Trump’s aggressive China gambit shifts international trade, it will deliver a windfall for his supporters in the form of new jobs, revitalized cities and related benefits. At a minimum, it will secure Trump a victory in 2020 whilst having massive consequences in the EU and Asia.

To conclude, China has avenues to reduce the trade deficit with America without compromising its strategic interests. Obviously, there are downsides: It will jeopardize its relationship with the EU and old allies such as Iran. China will probably calculate that it has more to gain by staying in the good books of Trump when faced with the alternatives. The U.S. will also have to play ball if the deficit has to be reduced by calibrating its concerns about national security and intellectual property in relation to high-tech goods and developing mitigating protections rather than banning sales.

Trump’s hardball with China could be the most significant event in trade for the last three decades. It has the potential to restore U.S. primacy and re-order the trading world as we currently know it.

Dr. Sandeep Gopalan is the pro vice-chancellor for academic innovation and a professor of law at Deakin University.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.