Should the US and China give up on a deal?

The $68 billion affected thus far in the US-China trade standoff is a tiny fraction of economic activity in either country. Significant escalation, if it occurs, is weeks or months away.  The bigger problem is that, if a deal is reached, only a year and a half of calm may result. The two countries’ short-term behavior is being fueled by the realization that no agreement will last.

The Trump administration is a difficult negotiating partner because it is divided on China goals. A lower bilateral trade deficit? Retaliation for coercive technology practices? A fundamental change in the PRC’s economic model?

The American press tends to skim over Beijing’s own foolish approach to the dispute. For more than a year, the Chinese view was President Trump would be pacified by a few headline deals. This was proven wrong in May, when Secretary Mnuchin failed to sell the President on the PRC’s low-ball offer.

Since that failure, the US has been seen as unstable or bent on crushing China. But Beijing’s own statements are of little use, calling for the same dialogue that has been empty for more than a decade. There are even specious claims that the latest version of decades of expensive, discriminatory industrial policy is merely non-binding guidance.

The situation has deteriorated in the past few weeks. The bilateral goods deficit in the first half of this year was estimated on Friday as $185 billion, 14 percent larger than the first half of 2016, when candidate Trump assailed it. The RMB has dropped 7 percent against the dollar since the May deal failed, a response guaranteed to further provoke President Trump.

The US just moved to limit technology cooperation by passing the Foreign Investment Risk Reduction Modernization Act (FIRRMA). Chinese investment in the US has plummeted since 2016 and now faces indefinite restriction. Some American national security officials wish to strengthen export controls beyond FIRRMA. American investment in China would thus be curbed even without retaliation by Beijing.

US second-quarter economic results trended stronger while the PRC’s trended weaker. Both economies have important flaws, starting with greatly excessive debt. But there remains no risk for the US equivalent to the $337 billion in foreign exchange China gained last year from bilateral trade, money Beijing needs to finance the Belt and Road initiative, among other things.

Politically, broad criticism of Trump administration trade policy has recently been muted by the creation of a negotiating framework with the EU and considerable progress with Mexico. The American business community has shifted from aggressively pro-China toward neutrality.

Given this situation, why hasn’t Beijing made a better offer, to attempt to preserve the status quo as fully as possible? A public offer would also build pressure for the US to respond constructively. The answer may be that the value of a US-PRC deal declines almost every week, because both sides know it won’t hold for long.

Within 18 months, President Trump will probably become more hawkish on China trade. If the bilateral trade deficit hasn’t been cut or there aren’t clear, meaningful, and enforceable changes in Chinese policy, candidate Trump’s extremely strong 2016 language will be thrown back at him again and again by Democratic presidential hopefuls.

And that’s only half the story. Xi Jinping has cultivated the image of another Mao rather than another Deng, a political strongman uninterested in pro-market reform. Xi will be in power indefinitely, leaving little hope for genuine change and leading to broader American antagonism as his personal dictatorship persists.

American policymakers demanding the PRC abandon much of its industrial policy can seem naïve. It’s more likely they have come to accept a painful trade conflict because they don’t believe China is truly willing to become a good partner. After 25 years of enormous expansion, the US-PRC economic relationship is going to shrink, sooner or later.