Trade gets more attention than it deserves

Illustration: Liu Rui/GT

Editor’s Note:

“This is an epic deal, historic – if it happens,” said US President Donald Trump in early April over a potential trade agreement with China. How close are the two largest economies to the end of the trade war? If a deal is to be reached, will it be a temporary truce or will it set up a long-term trade model? During the fifth China and Globalization Forum on Sunday organized by Beijing-based think tank Center for China and Globalization, Terry Miller (Miller), director of Center for International Trade and Economics, Heritage Foundation, and former US ambassador to the UN, shared his views with Global Times (GT) reporters Li Aixin and Bai Yunyi.

GT: What is the biggest uncertainty on the way to a final agreement at this moment? 

Miller: I think they’re very close to a final agreement. I use the word “final” guardedly because the most important thing we’ll do is to put in place mechanisms through which the US and China can continue dialogue in the future on important issues that create friction in the relationship. 

They’re not going to resolve all of the issues like technology transfer or respect for intellectual property. Those issues aren’t going to go away as a result of this agreement.

I think there will be some features in the agreement that probably contribute to greater (trade) balance in the relationship between the two sides. I don’t know whether that’s really that good or not from a free market perspective. Trade imbalances don’t bother me, but that seems to be very important to President Trump. So that will be seen by him as positive. The two countries are going to create some enforcement mechanisms. There will be enforcement offices on both sides.

GT: It is possible that the trade talks wrap up like the Hanoi summit, which was in spotlight long before the meeting, but ended without an agreement. Is a no-deal outcome the worst-case scenario?

Miller: No, it would not be the worst-case scenario. A no-deal outcome would result in the imposition of more tariffs and retaliatory tariffs. That would be a worst-case scenario, I guess. But it depends on what follows that.

The Hanoi summit perhaps didn’t meet expectations. People outside of the governments at least had hope of a further step forward. But by the same token, it didn’t result in a breach in the ongoing dialogue between the US and North Korea. In fact, it’s likely that the leaders will meet again at some point in the not-too-distant future. And the process that was started by Trump and Kim Jong-un will continue. 

You’re not going to solve every issue for all time at any given moment in that relationship. There will always be issues that arise. And some issues on trade are extremely difficult because they involve the ongoing development and evolution of the Chinese economy in particular, something that started about 40 years ago.

Over time we see reform and then sort of stability, and then more reform and stablility again. That’s a process that can continue for a century or more. China is undertaking modernization and a very gradual move toward allowing market forces to play a significant role in the economy. That’s not something that happens overnight. It’s something that happens over time. 

As long as China maintains a predominant state control of its economy, there are going to be frictions between the US and the more market-oriented economies, just because the systems are so different. 

But China’s system has been evolving and our systems change too over time. As long as we have the right kinds of positive dialogue and mechanisms in place, we can discuss the problems that evolve. The US and China have a huge trade relationship right now, and nothing about this so-called trade war has really interfered with that. It’s in no one’s interest to see that change.

GT: Will the potential trade deal be a short-term cease-fire, or will it greatly change the previous China-US trade model?

Miller: That’s a very difficult question to answer because it’s such a good question. Answer is, I don’t know.

It’s possible that it will be just a cease-fire. Tensions could continue. President Trump himself and some of his close advisors have a view of trade that I do not agree with – the main interest in the US is how much it exports to other countries. My view is the free market view, that the primary benefit of trade is the imports that come into the US.

Those are completely opposite views. But Trump is the president of the US right now, so his view counts far more than mine in our political system. As long as he is president, anytime there is a trade imbalance, a trade deficit run by the US, he’s going to think that something needs to be done about that, whether that is a trade deficit with China or with Mexico or with Europe or whoever.

As long as the US is running big trade deficits, and I think we will continue to run big trade deficits, President Trump is likely to continue to want to use tariffs and other protectionist measures to try to address that. So that will be one of those ongoing issues that we will need to manage in the relationship.

GT: Apart from President Trump, do you think many other Americans are still looking for a totally new pattern for China-US trade?

Miller: No, I don’t think so. Most Americans know very little about US-China trade. Trade is still a relatively modest part of the US economy. Our domestic market is much larger than many of our trading relationships. I think people who understand how they benefit from our trade relationship with China are very positive about it.

Trade, like many other economic issues, such as innovation and productivity changes and technology changes, can affect individuals, because jobs change, companies evolve. Individuals can be hurt by those changes and trade is one of them.

There’s a tendency to blame trade more than it probably deserves. But by and large, people in the US are strongly committed to maintaining open trade relationships with all countries around the world, and that certainly includes China.

I’m probably wearing a suit made in China and probably a shirt too. I bet this tie is made in China.

GT: Will China-US trade issues be impacted by the upcoming 2020 elections?

Miller: No, it won’t be impacted very much by the upcoming elections.

It’s kind of interesting that the trade policies of President Trump are actually more consistent with the historical trade policies of our Democratic Party than the Republican Party. If he wins the election, I think the policies toward China, particularly if there’s an agreement, which there is likely to be, will stay in place. But if a Democratic candidate were to win the elections in 2020, they would also want to continue the agreement for the most part, and I wouldn’t see any greater tension at that point in the relationship.

GT: How do you foresee the development of global free trade in the future? 

Miller: I’m very positive about the future of global free trade. The vast majority of countries have realized that their prosperity is greatly enhanced by freer trade.

The use of trade preferences and other programs like that is probably not going to be expanded. But we do see that countries are increasingly making bilateral or plurilateral arrangements to lower tariffs and increase trade among themselves.

That kind of process will continue. We’ll see barriers continue to drop. It won’t be a straightforward process. As particular issues arise, we may see tensions regarding high-technology products, for example, as technologies change, they may have military or other significance. Sometimes countries feel the need to put restrictions in place, but over time, technology changes and those restrictions become irrelevant.

GT: Some say that major economies such as the US, China, the EU and Japan will eventually set up a free trade zone without trade barriers. Do you think it is possible? 

Miller: Wouldn’t that be lovely?

Probably not in my lifetime, but maybe in yours. It’s certainly possible. The era of global trade negotiations has kind of passed. Now, we had great rounds under GATT and the WTO of multilateral worldwide trade liberalization. Those got off track because they were sort of hijacked by the development agenda of countries which want special carve-out and resource transfers. So, they got away from the idea of just lowering tariff barriers.

But the other factor is that by and large, that process succeeded. Tariffs are very low in most countries of the world, certainly compared to what they were. Trade does flow more or less in a free way. 

So, the question is how to improve that marginally. Maybe you can do it through the WTO on a worldwide basis, or maybe these regional and bilateral agreements will do it and add up to the same thing over time. The US and China have an agreement. The EU has an agreement with China, and we have an agreement with the EU and before you know it, maybe it does add up to what you said, where all of the major players are operating essentially in free trade.

GT: Some observers say that China and the US need to find something to cooperate on so as to bond them together. Due to the lack of driving force to resolve the Korean Peninsula nuclear issue, is the foundation of China-US cooperation weaker than before?

Miller: No, so far China and the US have cooperated well in connection with the Korean issue. It seems to be in both countries’ interests to have that resolved again in a peaceful way.

So, both nations have an interest in working together to manage the situation on the Korean Peninsula.

GT: During the forum, a participant said that the US is drawing up a list of areas where it seeks to block China’s development in technologies. After the trade war comes to an end, do you think the US would come up with other strategies to disrupt China’s development?

Miller: The technology issue is going to be difficult to manage. During the Cold War, the US had advanced technology and we were trying to prevent the acquisition primarily by Russia. And now China is developing technology on its own, and the US is developing technology. How those intersect is very complicated. It’s not a straightforward relationship of one country having technology and trying to prevent the other.

The threats that technology can pose to other countries are not well understood. That means they may be exaggerated or they may be underplayed in a negative way. There’s a lot to be learned. There are good defenses by either side against the potential to destabilize through technological means, through cyber measures. Maybe we’re going to go through a period where we have to understand that China has the capability to destabilize the US, and the US has the ability to destabilize China, and both countries will refrain from doing that.

GT: You said it is nonsense to hype up the idea that China and the US will likely fall into the Thucydides’ trap. But US fear over China seems to have evolved rapidly in the past few years with many saying Chinese scholars and students there are mostly spies, and so on. Has such vigilance in the US grown to something like McCarthyism?

Miller: No, not even close. In the US, particularly in our media environment right now, very small groups, very small voices can sound very loud. That happens on all kinds of issues. That happens sometimes on the China issue too. But I think the vast majority of Americans regard China with a kind ignorance, a sort of benign goodwill. There is no particular fear of China. We have a very large Chinese community in the US of ethnic Chinese immigrants. They have integrated fully into our society.