Can the U.S. and China Avoid a Trade War?

Henry Paulson on Engaging with China

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Penn's Jacques deLisle and NYU's Ann Lee discuss the future of U.S.-China relations.

How far will Donald Trump act on his campaign rhetoric against China? His regime may walk away from the Trans-Pacific Partnership in its current form, which doesn’t include China, but a campaign pledge to slap high tariffs on Chinese imports would have significant consequences, says Jacques deLisle, law professor at the University of Pennsylvania Law School and director of Penn’s Center for East Asian Studies. Trump may reject the 2015 United Nations’ Paris accord on climate change and the U.S.-China pact on the same issue a year earlier, but economic realities will prevent him from protecting the U.S. coal industry, says Ann Lee, an adjunct professor of finance and economics at New York University.

The two experts discussed those and other issues impacting the future of U.S.-China ties on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Here are five takeaways from their discussion:

The TPP’s Future: The U.S. had assumed a leadership role of sorts in trade and investment by promoting the Trans-Pacific Partnership, says deLisle. China was not part of the TPP, but since both Trump and Democratic Party rival Hillary Clinton opposed it, “the TPP, if it is not dead, it’s certainly deeply in a coma,” he adds. However, Trump could negotiate a different trade deal to substitute the TPP “with his name on it,” says Lee. He may keep pieces of the TPP he likes and reject the rest, she adds. Trump may also abandon the agreement with China on climate change, says deLisle.

However, China will stick to its commitments on climate change regardless of what the U.S. does, “because China just has to clean up its environment,” says Lee, adding that China faces immediate pressures to deal with air quality and water pollution. With regards to Trump’s campaign promise to support the coal industry, economic realities would get in his way, says Lee. “He may want to bring back coal miners, but the fact of the matter is natural gas is so cheap now that it’s not economical to switch back to coal.”

“The TPP, if it is not dead, it’s certainly deeply in a coma.”–Jacques deLisle

Trade War Threat: According to deLisle, if the U.S. were to levy high import duties of 35% or 45% — as speculated — on imports from China, it would risk retaliation and quickly slip into a trade war. The U.S. would also have to justify such actions before the World Trade Organization (WTO) and that would be a difficult task, he adds. According to Lee, in such a high-tariff regime, U.S. companies that outsource from China would be hurt more than their Chinese counterparts, which would lead to price inflation in the U.S. “By pressuring companies’ profits this way, this is not going to make America stronger as [Trump] promised,” she adds. She expects him to modify what he has said on the campaign trail.

Caution on Chinese M&As: Cash-rich Chinese investors have been looking for investment opportunities abroad, but it is not clear what a Trump presidency would mean for that trend, says deLisle. “If we got into a tense bilateral relationship, there might be concerns about those investments being at risk,” he adds. China, he says, has long complained about what it sees as U.S. politically-based restrictions on Chinese investments and has adopted its own mirror-image law for foreign investments in its country. The U.S. Committee on Foreign Investment has rarely stopped investment deals, “but the lion’s share of the deals that have been stopped have come from China,” he notes. Lee says if Chinese M&A slows down in the U.S. it would probably pick up in other parts of the world such as Germany or Russia.

What to Look Out for: Lee says she would look at both economic and political moves from the Trump Administration. Trump might brand China as a currency manipulator, take a hard line against China on its territorial claims and militarization of the South China Sea, or take a harsher stance against North Korea, she notes. Sanctions could follow some of those actions, causing an economic impact, she adds.

DeLisle notes that Chinese response to the election results, tellingly, was that it wanted to continue to work on areas of economic cooperation. Lee, too, says China would like a smooth economic and political relationship with the U.S. “China recognizes that any political or military threat would not be good … economically, so it wants to make sure those tensions are moderated,” she adds. “With the world slowing down economically, any tensions with the U.S. would make things worse.”

If the U.S. were to withdraw somewhat from Asia, there would be concern about who would then have greater influence in Asia, and what Japan or South Korea might do, says deLisle. “China would get skittish and may develop nuclear weapons,” he adds. “It’s a nightmare scenario out there that may not be better for China.” Lee says Asian leaders are nervous already. On tensions over the East China Sea between Korea, Japan and China, “[Japanese prime minister Shinzo] Abe felt that the U.S. is solidly on his side, and if Trump were to reverse that then Abe would feel somewhat naked about the whole thing,” she adds. At the same time, she notes that Trump is already “backpedaling” on some of his campaign threats towards Asia.

“Trump needs to ensure that to make America great doesn’t mean to hurt other countries.”–Ann Lee

Trump’s Chinese Checkers: On relations with China, Trump’s rhetoric hasn’t helped, but much depends on who is appointed to deal with China, says Lee. She finds it disconcerting that one name making the rounds is Peter Navarro, professor of public policy at the University of California at Irvine. She says books he has written on China were “very inflammatory” and “a lot of facts were suspect in them.” Navarro’s books include “Death by China: Confronting the Dragon – A Global Call to Action” and “The Coming China Wars: Where They Will Be Fought and How They Can Be Won.”

“Trump needs to ensure that to make America great doesn’t mean to hurt other countries,” says Lee. “He should see the wisdom of being strong without being mean or caustic with other countries and that means finding a way to be cooperative with China and other countries in achieving economic and security goals.” All said, one has “to wait and see because ‘unpredictable’ is the operative word” in matters relating to Trump’s presidency, she adds.

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