The United States has recently ratcheted up pressure on China, focusing on the trade imbalance between the world's two largest economies. During the 2016 presidential race, one of the important points of appeal for then candidate Donald Trump was his bold approach to addressing the United States' huge trade deficit with China. As such, the Trump administration's stepped-up trade offensive against China has caused no surprise to me at all.
What really surprises me is the U.S. president's stance to deliver on all those campaign promises of his that are neither coherent nor consistent.
Considering that there were some campaign pledges on which Trump did an about-face in his early days in the White House, it may be correct to say he has "embarked on" efforts to follow through on his election vow with respect to the trade friction with China. Within the United States, he has been derided for trying to look as if he has fulfilled a "Trump campaign pledge."
When we look at the issue of the U.S. trade imbalance, the first thing we need to be aware of is the fact that the imbalance is caused not by foreign countries but by U.S. consumers' excessive consumption. This is, in a sense, the very principle of international trade as described in international economics textbooks.
I recently met some U.S. economists and urged that they "let the U.S. public correctly know about this point and even speak to President Trump and policymakers around him about it." Looking embarrassed, they gave little reply. They used to be proud of contributing, in one way or another, to the U.S. government's making and implementation of policies. Now they have a sense of helplessness as Trump serves as president.
In early March, Trump first signed orders imposing stiff tariffs on imports of steel and aluminum from various countries, and later in the month a presidential memorandum was signed to levy punishing tariffs on hundreds of Chinese high-tech products. In May, the U.S. administration launched a national security investigation into imported cars that could result in new U.S. tariffs, though China is not the main target of the third salvo. The three protectionist moves have cast a shadow over world trade.
It is true that the root cause of the U.S. imposition of sweeping tariffs on steel and aluminum imports is China's excessive steel and aluminum production, which has led to a global glut in those products. Nonetheless, China has accounted for only about 2 percent of the United States' overall steel imports in recent years.
As the steel and aluminum tariffs were announced as a worldwide slap, there are many countries that would suffer greater damage than China. Trump resorted to such punitive tariffs as a tactic in domestic politics to create an advantageous environment for the Republican Party in a March 13 special election in Pennsylvania, a world-renowned center of steel production, to fill a vacant congressional seat. Despite Trump's move, the Republican candidate lost that election.
The Trump administration has been using the tariffs on steel and aluminum as a card in international negotiations to intensify pressure on Canada and Mexico to update the North American Free Trade Agreement and on Seoul to revise the U.S.-South Korea Free Trade Agreement.
Distinguish China from Japan
In the meantime, on June 15, the United States decided to implement a punitive 25 percent tariff on 50 billion dollars worth of Chinese goods in retaliation for what Trump called China's "intellectual property theft." China immediately announced equivalent retaliatory tariffs. Washington and Beijing have thus escalated a tit-for-tat trade row.
There is no doubt that the penalty for "stealing" U.S. intellectual property is purported to target China alone, but other countries are likely to be indirectly affected.
Some people in the United States want Washington to keep pressuring Beijing in U.S.-China trade negotiations in a way reminiscent of its high-handed approach to Tokyo in U.S.-Japan trade negotiations that were held in the late 20th century.
Yesterday's "worst enemies" may become today's "best friends" once a war is over. In the United States, some people cite Japan, which once fought their country, as a good example. I have to say this is a case of a superficial understanding of history. Yet, it was shared by certain people in the United States when the country invaded Iraq. Against this background, there may be some people in the United States who are prone to think that it will be possible for their country to deal with China as it did with Japan.
But it is evident that there is a major difference between Japan and China in their attitudes toward the United States. Japan relies heavily on the United States with the Japan-U.S. Security Treaty, while China advocates the division of the Pacific into eastern and western halves from Hawaii.
When we compare Japan-U.S. and China-U.S. economic relations, it becomes clear who has benefited from such bilateral relationships. The first difference in economic terms is that, in the postwar decades, the trade imbalance between Japan and the United States reached explosive levels on many occasions and Japan was the "winner" every time, clearly gaining most of the benefits.
In contrast, it is said that a significant portion of profits by trade once gained by Chinese companies is paid back to the United States as dividends of U.S. capital invested in China.
The second difference is that many of China's U.S.-bound products face no competition in the United States as such goods are no longer manufactured there. This means that even if the United States restricts imports from China, such a measure is useless to save U.S. businesses that are in trouble for reasons that have little or nothing to do with China. As long as U.S. consumers need certain products manufactured abroad, U.S. government action to halt Chinese imports will only result in greater imports from other countries. It will not, however, cause those products to be produced in the United States.
When Japanese companies chose to launch local production in the United States, there were U.S. competitors manufacturing similar products on their home soil. Subsequently, U.S. electric appliance manufacturers that were less competitive collapsed and vanished, while U.S. automakers and steelmakers became less resilient in the wake of fierce competition with their Japanese rivals. But the current situation is totally different from what happened in the past.
Should China manipulate its renminbi currency's foreign exchange rate as alleged by Trump, such currency operations could impede fair competition by countries that manufacture products similar to Chinese ones, not U.S. manufacturers. So there is little point in raising possible currency manipulation as a bilateral issue to be dealt with by Washington and Beijing.
Different investment environments
The third difference is the difference concerning manufacturers' potential for investment. When they came under strong U.S. pressure to help reduce the U.S. trade deficit with Japan, Japanese companies opted not to handle the issue through conventional export or import solutions. They invested in the United States and increased local production there, even though they had been forced to do so. As a result, they were able to keep selling their products in the world's largest marketplace.
Japanese automakers now manufacture a considerable portion of cars sold in the United States at their U.S. plants. Japanese businesses are even among the largest employers in some U.S. states. In the case of products the United States now imports from China, many of them are low- or medium-level value-added goods made by small or medium-size companies. Chinese companies of that size cannot afford to relocate manufacturing operations to the United States.
The fourth difference is the tightening of U.S. regulations on inward investment. When Japanese companies began opening U.S. manufacturing operations, inward investment screening procedures in the United States were not so rigid. The Committee on Foreign Investment in the United States (CFIUS), chaired by the U.S. secretary of the Treasury, reviews the national security implications of investments in U.S. companies by foreign entities, including oil-producing countries. As for Chinese investments, the inter-agency committee presumably applies relatively strict restraints when assessing investments in U.S. companies, especially the acquisition of existing ones, by Chinese firms that may be subject to state capitalistic interference.
China's information technology companies are now considerably sophisticated and have sufficient capabilities to be competitive in the United States. However, the United States is very reluctant to accept foreign direct investment in the IT sector. Moreover, Chinese IT-related companies' performance is less relevant to trade data, including exports and imports.
It is also worth noting that, as part of its reaction to the second round of U.S. accusations regarding its trade practices, China announced plans to ease restrictions on foreign ownership of companies in the country. The medium-term plans offer phased relaxation, allowing 50 percent, majority and full foreign control of corporations in China. Major U.S. companies as well as the U.S. government issued statements welcoming the Chinese plans.
Needless to say, the medium-term plans are a positive move. But, in the short term, it remains doubtful that the Chinese plans, which envision starting with the financial sector and gradually expanding to other sectors, are meaningful enough to satisfy Trump's supporters in the United States. The U.S. leader's support base may be weakened if it becomes known that the Chinese response will benefit the U.S. financial sector -- the target of the "We are the 99 percent" movement protesting against the concentration of wealth in society among the wealthiest 1 percent of people.
Further, if the Chinese plans to ease and eliminate the limits on foreign ownership help U.S. distributors of goods or services to set up operations in China, Trump's supporters will not feel antagonized. If U.S.-based manufacturers find it attractive to relocate operations to China, there may be mixed reactions from Trump's supporters who in November 2016 applauded the then president-elect for stopping Ford Motor Co. from moving a car plant to Mexico.
The future of the confrontation between the two powers hinges on whether the U.S. side correctly understands that its experiences in the earlier trade disputes with Japan will be of no use and whether the Chinese side is prepared to move ahead to improve the situation without feeling that it has already done enough.
-- Watanabe is president of the Tokyo-based Institute for International Monetary Affairs, a post he has held since October 2016. From December 2013 to June 2016, he was governor and chief executive officer of the Japan Bank for International Cooperation. He was also vice finance minister for international affairs from 2004 to 2007.
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