U.S. Finds Allies to Challenge China’s Trade Tactics

The U.S. finds itself isolated in its efforts to temper support for globalization. It’s having greater success rallying rich countries to rein in a common rival: China.

At the World Trade Organization meeting this week in Buenos Aires, the U.S., European Union and Japan agreed to target excess capacity in important industries and called on countries to curb state financing. While the declaration didn’t name China, it’s an implicit warning to President Xi Jinping that they’re losing tolerance with its state-driven model.

The WTO statement marked a victory for the U.S. in a year of rocky economic diplomacy. Driven by President Donald Trump’s “America First” doctrine, the U.S. in March convinced Group of 20 finance ministers to renege on commitments to fight protectionism. But later this year, they reaffirmed the vow to open trade, snubbing Trump’s call for a reset.

China’s “economic aggression is challenging the rules-based economic order that helped lift hundreds of millions of people out of poverty,” White House national security adviser H.R. McMaster said Tuesday at event in Washington.

America’s push comes at a delicate time for the global economy and security in Asia, where the U.S. wants Beijing’s cooperation to thwart North Korea’s nuclear program. Trump is considering trade actions that could provoke retaliation from Beijing, and an abrupt shift in China’s growth model could undermine the global recovery.

Rising Tensions

Tension between Washington and Beijing is rising. Their main channel of economic talks, the Comprehensive Economic Dialogue, was put on hold for lack of progress. U.S. efforts to isolate North Korea from the U.S. financial system through heavy sanctions includes restrictions on Chinese companies.

Meanwhile, trade disputes proliferate. The Commerce Department is due to report next month on investigations into steel and aluminum imports, while the U.S. Trade Representative office is probing China’s intellectual-property practices. While Trump hasn’t delivered on threats to crack down on China, he still has broad authority to impose tariffs and other barriers.

“The way you make progress with China is a yard at a time,” said Nathan Sheets, who was Treasury undersecretary for international affairs under Barack Obama. “The risk is that if we’re not engaging with them, they’re not going to make progress they would otherwise.”

China’s Commerce Ministry didn’t immediately respond to Bloomberg’s request for comment.

Xi’s reforms have shaken up steel and aluminum. Steel exports are down nearly a third this year after sweeping closures of illegal and substandard plants boosted domestic prices. Aluminum producer shutdowns put prices on pace for the biggest annual gain since 2009.

Market Economy

U.S. officials are urging major economies to join them in calling out China for slow reforms. The U.S. lobbied for China joining the WTO in 2001, arguing it would accelerate economic liberalization. Trump’s administration says Beijing hasn’t delivered, and joined the EU in rejecting China’s bid for “market economy” status at the WTO, which would ease tariffs.

In a speech to the Communist Party Congress in October, Xi said the market must play “the decisive role in resource allocation” and that government must do a better job. He vowed greater state-owned enterprise reforms to develop mixed ownership, but also backed a stronger, better and bigger state sector.

The U.S. economic relationship with China can’t be easily untangled from the strategic one. China is central to resolving the crisis with North Korea and its nuclear program. China accounts for at least 90 percent of North Korea’s exports, according to the Treasury Department, making Chinese cooperation key.

Treasury Secretary Steven Mnuchin has said he spends about half his time on sanctions and national security, a departure from predecessors who focused on expanding economic ties.

Global Rebellion

The Trump administration’s strategy puts the U.S. in the unusual position of rebelling against the postwar global economic system it helped create by backing creation of the International Monetary Fund, World Bank, and international trade rules that led to the creation of the WTO.

“It’s been a very long time since the U.S. may be acting as potentially a destabilizing force as opposed to its historical role,” said Stefan Selig, who served as the Commerce’s top trade deputy under Obama and is now managing partner at investment firm BridgePark Advisors.

At the WTO meeting this week, USTR Robert Lighthizer said new trade rules can’t be pursued when current ones aren’t followed. Meanwhile, China Commerce Minister Zhong Shan defended the WTO’s trade promotion role and backed globalization.

“We have been aware that the U.S. is backing away from the global system, and we are getting prepared,” said Wei Jianguo, former vice commerce minister and now an executive deputy director of the China Center for International Economic Exchanges. China wants to improve the global system that the U.S. created, not overthrow it, he said.

China will beef up interactions with multilateral organizations, increase funding to such institutions, and strengthen its influence, Wei said. “The China-U.S. relationship is long term, and won’t be overturned under one or two presidencies,” he said.
Source: Bloomberg