Thursday, May 31, 2018

Memo on the U.S.-China Trade talks and the Japanese Experience


1. The Trump model is the U.S.-Japan trade negotiations of the 1980s and early 1990s, what model will work better in your judgement?

They are difficult to compare because they are two different approaches for two different relationships, under two different historical circumstances. I would argue that the US-Japan negotiations probably will wind up as having worked “better.” Let me explain.

The United States faced then, as now, a major economy in ascendance. However, the US economy was widely seen to be in relative decline vis-à-vis Japan, an economy led by a private sector over which the government had limited control. By comparison, it is confidently riding the crest of a near-decade recovery from a global financial crisis and is seen at the forefront of a new industrial revolution—with China, a state capitalist economy if ever there was one, as its main competitor. In addition, the United States had a robust security alliance with Japan that remained unshaken throughout the trade friction years. The security relationship with China, by contrast, is at bottom one of antagonism between two hegemons. The latter point is particularly significant because the Trump administration is explicitly linking one of its most important its security goals—denuclearizing DPRK—to the bilateral trade relationship. At a minimum, this complicates any deal because  the economic and security issues move on different timelines and trajectories. At worst, resolution on both fronts become impossible because of the complications. It certainly doesn’t help that Trump’s negotiating team is hopelessly divided, while Trump himself does not have the expertise, knowledge, or temperament to resolve the contradictions in a coherent manner. Also complicating the calculations is the fact that the Chinese authorities, with some justification, appear to believe that Trump’s business interests can be leveraged to bring about a favorable resolution (for China). That, again, could backfire.

2. The White House convinced Japan to accept export quotas in the 1980s when President Ronald Reagan carried out a strategy of “managed trade.” It didn’t happen this time with China. What is your take on this?

First of all, it’s still early in the game regarding China. They’ve only had one round of high-level talks. The relationship is set to worsen before it stabilizes, hopefully in a way that is beneficial to the Japanese economy.

Second, the Trump administration has a cluster of demands, some that are connected to the trade deficit, some that are connected to security, and still others that are connected to investment in China, which arguably would worsen the trade deficit. But it does not appear to have a coherent strategy. At worst (from the global perspective), China could end up buying more commodities (agricultural products, natural gas, etc.) from the US at the expense of China’s other trading partners who would then seek to make up the difference by increasing exports to other markets, while the more important microeconomic issues, mostly technology- and IP-related go largely unaddressed. It would be ironic if the only outcome was a rearrangement of trade patterns while trade and investment balances remain virtually unchanged.

3. Many Japanese elites tell Chinese policy makers, they “should learn lessons from Japan,” especially over the Plaza Accord. if you give suggestions to Chinese policy makers, what lessons you believe China should learn from Japan?

I wasn’t aware that “many Japanese elites” were in the business of advising the Chinese government and, frankly, the Chinese government surely has enough expertise and experience to weigh the Japanese experience to determine its course of action without outside help.

4. How do you compare the trade tension then to the current US-China one?

The trade tension felt stronger then, but that’s surely because we were the other party to the conflict and I had a role, albeit quite minor, in it. The current tension is more worrisome because it is  part of a geopolitical conflict that should long outlive the end of President Trump’s current term.

5. If any suggestions to Chinese, what would you say on how to deal with America?

Well, obviously, I want China to yield on investment and IP issues while standing firm on quantitative targets. It’s an economic win (US)-win (China)-win (WTO) outcome. But the decisionmakers surely do not see it that way. Beyond that, if someone is willing to pay me to help devise a negotiating strategy, I’ll be happy to oblige as long as I don’t find the objectives and the means morally unacceptable.

If we are to believe what orthodox economists tell us, imposing no quotas, freely investing in each other’s economies, and protecting IP under commonly-acceptable standards—basically national treatment under market economy rules—would maximize economic welfare for all the economies, and equity concerns could be taken care of by national laws and regulations. And I also want a pony. But I’m aware that sovereign states have different, politically-informed goals, China dramatically, but the United States as well, particularly under the Trump administration. So the pony should be the easiest part.

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