WSJ: China playing Let's Make a Deal after trade-war threats

Last week, China threatened a massive trade war after Donald Trump imposed $50 billion in tariffs on their exports. This week, Beijing’s top economic official has begun to do his best Monty Hall impersonation, according to the Wall Street Journal. After a notably mild first response, China has quietly begun to offer better access to its markets to the US:

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China and the U.S. have quietly started negotiating to improve U.S. access to Chinese markets, after a week filled with harsh words from both sides over Washington’s threat to use tariffs to address trade imbalances, people with knowledge of the matter said.

The talks, which cover wide areas including financial services and manufacturing, are being led by Liu He, China’s economic czar in Beijing, and U.S. Treasury Secretary Steven Mnuchin and U.S. trade representative Robert Lighthizer in Washington.

In a letter Messrs. Mnuchin and Lighthizer sent to Mr. Liu late last week, the Trump administration set out specific requests that include a reduction of Chinese tariffs on U.S. automobiles, more Chinese purchases of U.S. semiconductors and greater access to China’s financial sector by American companies, the people said. Mr. Mnuchin is weighing a trip to Beijing to pursue the negotiations, one of these people said.

Rather than go big, the WSJ’s Lingling Wei and Bob Davis point out, China imposed only a nominal set of tariffs after Trump’s announcement. They only impacted $3 billion in imports, less than 10% of the scope of the US tariffs announced by Trump. Those moves signaled an openness to talks, at least in the short run, to resolve any outstanding issues.

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That, of course, plays right into Trump’s strategy of casting himself as a master dealmaker, a point which does not seem to bother China. How much can we expect out of a renegotiation, though? China certainly won’t give the farm away over $50 billion in tariffs, but then again, perhaps Trump doesn’t need a dramatically better deal. Even an incremental improvement would be a major win for his aggressive tactics, especially since his predecessors seemed mainly content to complain about China without taking any significant action.

Perhaps we can see a hint of this in South Korea, where negotiators claim they have reached a deal in principle on a renegotiated free-trade agreement:

The United States and South Korea have agreed to settle their differences on trade. The South Korean government said Monday that the two countries had struck a deal on a new version of the free trade agreement that has linked the two economies for the past six years.

South Korea has also secured a partial exemption from President Donald Trump’s new steel tariffs.

While South Korea is politically much closer to the US than China is, their trade practices had also given rise to many complaints. Trump targeted this trading relationship for his aggressive strategy, too, pointing out the annual $23 billion trade deficit with Seoul and their reluctance to open their markets to imports. But how much will we have won from the deal? Automakers will get to sell more cars, but the numbers may not dramatically rise in the near term:

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South Korea’s Trade Ministry said Monday it will double to 50,000 the quota for vehicles that meet US safety rules that can be imported into the country. Beyond that threshold, cars shipped from the US will have to comply with South Korean auto-safety regulations.

US automakers have previously complained that having to comply with the South Korean rules puts them at disadvantage.

The adjustments “will make little practical difference, at least in the short term,” said Tan of Capital Economics, noting that “no US automaker sold more than 11,000 vehicles in Korea last year.”

Long term, however, it gives US automakers an opportunity to push sales up for cars made in the US, which will boost jobs for American workers. It may not be a dramatic or immediate change, but again, that’s not the point. Trump will argue that all it took was having someone seriously threatening to punish unfair trade practices to shake up our trading partners and push them into giving concessions.

The flip side of this aggressive strategy is that it could land us in a trade war, of course, and that would be incredibly destructive. However, Trump seems to have the measure of his opponents, who thus far have demonstrated that they don’t want to get into an economic fight with the US and are willing to give some concessions. He appears to have succeeded in South Korea; if he can do that with China and again in a new NAFTA agreement, Trump can still make the argument that he did what other presidents could not or would not do. And … he’d be right. If he succeeds.

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