President Trump campaigned on and was elected in part because of his deal-making acumen. These are skills he says will lead to better deals for American businesses and workers.
As the president embarks on his first trip to Asia, the administration will showcase its deal-making skills with some of our nation’s most important trading partners, particularly China. If his rhetoric (or recent NAFTA negotiations) is any guide, the administration’s approach will be highly transactional – extending “asks” to the Chinese to receive “gets” to advance our interests.
But as an investment banker for nearly 30 years before joining the Obama administration – an appointment that had me regularly (and successfully) negotiating with the Chinese — I believe success will depend on commercial diplomacy, not on transactional deal-making.
I say that for four primary reasons.
First, the heat of a campaign makes it easy to label China a commercial enemy, but the responsibility of governing means acknowledging the reality. As our third largest export market, U.S. exports to China support nearly a million American jobs. That is almost equal to the total number of jobs supported by exports to Germany, France and Australia combined. China remains the third fastest-growing source of direct foreign investment, generating nearly $600 million in research and development investment. And Chinese imports are critical to providing the inputs that U.S. manufacturers need to create globally competitive goods and services.
Of course, we have real divergent interests, which create a complicated and challenging commercial relationship. But just as former defense Secretary Robert Gates stated regarding geopolitics, China can be our competitor or our rival, but there is no commercial reason why it must be our adversary.
This leads to the second point: Taking a transactional approach would be misguided because the “asks” of the two nations are fundamentally asymmetrical.
“As our third largest export market, U.S. exports to China support nearly a million American jobs. That is almost equal to the total number of jobs supported by exports to Germany, France and Australia combined.”
Since China’s accession to the World Trade Organization 15 years ago, its progress in reforming its economy has been disappointingly slow. U.S. businesses have long sought (and the Trump administration should continue to push for) a level playing field to sell their best-in-class goods and services in China, protection for intellectual property rights, and respect for the rule of law and transparency in business dealings.
China, on the other hand, wants recognition by the WTO as a market economy, despite the pervasive influences of state-owned enterprises. It also wants access to U.S. technology, which often has dual uses that would threaten U.S. national security interests, as well as greater and more transparent access to investment in the U.S.
Our issues are more numerous and as a free, open-market economy, the U.S. has very few “gives” not already available to China, so a solely horse-trading approach to the negotiations, defined entirely by give and take, will not be fruitful.
Third, there is the simple fact that China needs the U.S. China wants to achieve “moderate prosperity” and avoid the middle-income trap. To do so, it must improve productivity which can only be done by embracing market-driven policies, including reducing and eliminating policies that support grossly inefficient industries and provide massive financial support to prop up state-owned enterprises.
It also craves the global acknowledgment that China and the U.S. have a ‘major country relationship’ and that China is on its way to achieving its goal to “take global center stage by 2050.”
So let’s combine these two goals. Instead of approaching China as an adversary, let’s push them hard on the market-oriented trade reforms it needs to achieve its desired long-term goals, and let’s condition progress on meeting these goals are a necessary step towards achieving the major country relationship it desires.
Finally, despite the continued fixation on our trade deficit with China, it will not be solved on this visit. Trade deficits are driven less by the terms of trade and more by the supply and demand for savings. It is China’s savings glut, which doubled to 30 percent in 2014 from 15 percent in 1990, which drives the deficit by depressing discretionary consumption and domestic investment.
But this is about much more than one trip and much more than any comity between heads of state. I saw first-hand in China that relationships matter, as I worked to cement relationships of trust and respect with my counterparts at China’s Ministry of Commerce and with the Vice Premier.
Relationships are uniquely critical in business cultures where impression management and saving face are essential to communication and positioning. Unfortunately, the new administration has not yet filled many important positions, so negotiators will not be able to rely on these already established bonds. Any future that includes delivering wins to American workers and businesses will rely on filling those positions with the people who will do the hard work of building and maintaining constructive relationships with our Chinese counterparts at the working levels, before and after high-level visits.
Success during the President’s most important trip to date will depend on effective commercial diplomacy. Transactional deal-making – the stuff of “The Art of the Deal” – will ultimately not deliver for our workers, businesses or our country.