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Why Trump Won’t Out-Negotiate China

By Harry G. Broadman

The Trump Organization will soon morph into the Trump Administration, one that appears to be on track to establish a leadership and public policy apparatus on global economic issues that may well be the most naïve in modern U.S. history. Given the increasingly complex and volatile dynamics shaping world markets today, this could not come at a worse time, not only for the U.S. but for the rest of the planet.

Whether it’s trying to re-position the U.S. as the driver of world economic growth; execute sweeping protectionist measures and rescind existing U.S. trade agreements; re-energize the international competitiveness of U.S. businesses; or backtrack on U.S. commitments to reduce global warming in the name of restoring American sunset industries, what will seem possible to the Trump team at the close of business in New York City on January 19 will begin to turn into pipe dreams soon after the wrap-up of the many inaugural balls that will take place throughout Washington D.C. the evening of January 20.

Indeed, there will more than enough cold water to go around as the members of the new administration wake up and take their showers before heading to their new offices in the White House the morning of January 21.

Global Arm Wrestling

At the macro level, the most serious challenge that will face President Trump is the diminished role of the U.S. as the engine of the world economy.  The result is that Trump will have far less leverage than he currently imagines.

The stage was set in October, when the International Monetary Fund downgraded its projections for the globe’s and U.S. growth. For the world, growth was 3.2% in 2015; the IMF forecasts global growth in 2016 will turn out to be 3.1%. U.S. GDP advanced 2.6% in 2015. But the Fund believes U.S. growth in 2016 will be only 1.6%, and for 2017 it will be 2.2%; these projections are lower than what the IMF forecast just three months earlier by o.6%and 0.3%, respectively. These downward revisions are not a terribly promising outlook for the impact of the U.S. on moving the world economy forward.

Yet, that’s the good news for Trump.

TRENDING

The bad news is that average growth rates of the advanced economies is still half that of the emerging economies—a pattern underway for two decades but surprisingly has attracted little attention. In fact, emerging markets now account for 60% of the globe’s GDP. (A decade ago it was 50%.)

Worse still for President Trump is that as the global economy has expanded, 80% of that expansion is due to emerging market economies.

You may ask: what about China’s role in all of this? Yes, China’s growth has been a significant component of the emerging markets’ larger piece of the global economic pie over the past two decades. And China’s current troubles are not going anywhere soon: its problems are less cyclical and more structural, owing to the contradictions inherent in the Communist Party’s “socialist market economy.”

However, while it’s difficult to fully replace China’s role in this regard, India’s growth now exceeds China’s and many ASEAN countries as well as several in Latin America have developed strong track records. Even the economic performance of some African countries has surprised many.

On the other side of the ledger, many advanced countries remain in the economic doldrums: think Japan and think the EU. You don’t have to be a PhD economist (I plead guilty here) to figure out that none of this bodes well for Trump to swagger onto the international stage to press his economic agenda. The pattern of global economic growth has become multimodal. This is not your grandfather’s, let alone your father’s, U.S. economy.

Boxing China

No country epitomizes Trump’s economic challenge at the micro level more than China. While there’s a better than even chance that China’s, current problems will lead to a very hard landing, perhaps even to the extent that a profound political transformation takes place, if Trump proceeds with his stated objectives feathers will surely fly.

Unless you were asleep for the last year, how could you miss that during the U.S. presidential campaign, Trump repeatedly threatened China that, if elected, he would slap 45% tariffs on their exports to the U.S. All in the name of bringing back to the U.S. jobs and companies operating abroad.

Implementing such a sizeable, across-the-board tariff on a single country, let alone one of the largest economies— widely stated to be the second largest–in the world, simply would be unprecedented. Moreover, unilateral execution of such a policy by a U.S. president is legally constrained here at home as well as by U.S. commitments under the WTO. Most important, it simply would fail to achieve what Trump wants.

Here’s a few reasons why.

First, let’s be clear: the U.S. workers whose jobs Trump is trying to protect are, like the rest of us, also consumers. Hello? Where I come from tariffs generally mean consumers face higher product prices, not lower ones. Guess which country produces many of the goods purchased by U.S. consumers (aka U.S. workers)?

Second, subsidiaries of U.S. businesses located in China are major exporters of goods to the U.S. Unless Trump’s campaign promises were all for naught, the Trump tariffs, which are effectively taxes, hardly square with new president’s ambition to unleash the international competitiveness of U.S. business. Hello again? Question: Just how would that strengthen U.S. workers’ pensions, whose plans typically are invested in U.S. companies’ equities listed on our stock market?

Third, presumably Trump believes the tariffs will induce subsidiaries in China of U.S. firms to immediately pick up their stakes and return to the U.S. Problem is there are few large U.S. firms in China whose investments were not made based on long-term payoff calculations—a core strategy to make money in China’s opaque economy. I do not know of a serious executive in China who thinks any differently.  Good luck to Trump in getting these companies back on US soil any time soon.

Fourth, the result could be perverse for Trump. U.S. firms in China facing tariffs for sales back in their “home” market may well sell and/or produce their goods in third-country markets where such “taxes” would not exist and labor costs are lower than they are in the U.S.

In fact, major U.S. businesses already use China as a platform to export goods to markets other than the U.S. General Electric, for example, indicates this is the case for two-thirds of its production in China. Trump’s proposed policy would only further induce that practice.

Finally, if Trump thinks the Chinese would not retaliate big time against U.S. businesses and products, he is sorely mistaken. Beijing has done so before—or credibly threatened to do so—and would now have a basis on which to take such action and get a sympathetic reaction elsewhere in the world.

Under such circumstances, it would be hard to believe that China’s other trading partners—including the EU and other advanced countries that are major U.S. rivals–would relish, indeed exploit, such a turn of events.

The outcry by U.S. businesses toward the Trump team would come so fast and furious that the Administration would have little choice but to reverse course. Hardly a wise policy position for a new administration.

If history is any guide, Trump’s international economic objectives will, in practice, backfire. This time he won’t be “The Closer” he swaggers about. Is this the type of negotiator the U.S. wants?

____________________________________________________________________________________

Harry G. Broadman

Former Senior Managing Director at PricewaterhouseCoopers, World Bank Official, and Chief of Staff of the President’s Council of Economic Advisers, Harry Broadman has been at the forefront of many of the most critical global business and policy decisions over the past three decades. He shares a compelling perspective on opportunities and risks shaping our economic future.

Harry G. Broadman is CEO and managing partner of Proa Global Partners LLC, a boutique global management consulting firm, a senior fellow at Johns Hopkins University’s Foreign Policy Institute, where he also serves as director of Hopkins’ Council on Global Enterprise and Emerging Markets, and a monthly global business columnist for Forbes. A former US Assistant Trade Representative, Rand Corporation energy policy consultant, and a lifetime member of the Council on Foreign Relations, Broadman’s multifaceted perspective draws on more than 35 years of operational expertise in how businesses, markets, and governments really work on a day-to-day basis and how best to navigate and capitalize on their interactions. Most recently, he served as senior managing director at PricewaterhouseCoopers (PwC), where he founded and led PwC’s Global Management Consulting Emerging Markets Business Strategy Practice and also served as PwC’s chief economist. Early, he was managing director at Albright Capital Management LLC. Broadman offers distinct—and often provocative—insights on not only where are the market opportunities and risks in today’s global industrial landscape, especially in emerging markets, but also on how businesses, investors and policymakers can most effectively make strategic decisions today to achieve their aspirations for tomorrow. The author of two widely cited books, Africa’s Silk Road: China and India’s New Economic Frontier and From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade, Broadman also writes extensively for professional economics, foreign policy and law journals.

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