China and the US must narrow the trade gap by boosting trade, rather than curbing it

When the first summit between presidents Xi Jinping (習近平) and Barack Obama took place in June 2013, there was an interesting photo of them walking side by side at the picturesque Rancho Mirage in California, in striking resemblance to the strides of Winnie the Pooh and Tigger. Back then, the Sino-US relationship actually resembled the pleasant relationship between Pooh and Tigger.

This time round, at the meeting in Florida, although US President Donald Trump does not have a figure as slim as Obama’s, the fundamental basis of the Sino-US relationship remains solid. US policy towards China, and for that matter China’s towards the US, is unlikely to change much from the days of the Obama administration, no matter how much rhetorical bluff Trump had tweeted before (and after) the election. Both countries, after all, share many common interests in tackling global issues like North Korea, nuclear non-proliferation and climate change.

The timing of Xi’s visit could not have been better.

On the day Trump welcomed him at the Mar-a-Lago estate, tomahawk missiles were hitting targets in Syria, in response to the Syrian government’s alleged use of chemical weapons in the country’s civil war. All of a sudden, speculation about the Trump campaign’s connections to Russia subsided in Washington. And, all of a sudden, Trump was boasting about his rapport with Xi on TV.

Indeed, reports of the Xi-Trump summit suggest rosy days ahead between the two countries.

It appears that some kind of agreement has been reached on a range of issues. Most important to the US is China’s commitment to cooperate on the North Korea nuclear issue. Hence, Beijing’s orders to turn back North Korean ships loaded with coal. In turn, the Trump team appears to have calmed down over its two major complaints against China during Trump’s presidential campaign: the White House now says it will not label China a currency manipulator, and there has been no more mention of punitive tariffs on Chinese exports to the US.

Watch: Trump says China is not a currency manipulator

Can Washington narrow its trade deficit with Beijing in 100 days?

What next? Sources in Beijing suggest there will now be an intense 100-day negotiation between the two sides to resolve thorny trade issues. This time, Washington is looking for an outcome-oriented negotiation. Official US statistics put the country’s trade deficit with China in 2016 at US$347 billion.

There are several reasons why this figure may be a gross exaggeration. First, US customs considers the face value of imports to be their true value, instead of looking at just the value-added generated in China. In today’s world of global value chain production, this distinction is important, as, for example, the value added for an iPhone assembled in China is only about US$15, versus the phone’s overall value of more than US$300.

Second, over half of China’s exports are actually associated with multinational companies operating in China. That means a large portion of the trade benefits reaped from so-called stealing jobs from America actually accrue to corporate America.

Besides, this trade deficit figure does not include the trade in services, where the US enjoys an overwhelming surplus.

So if one takes all of these into account, the Sino-US trade deficit is not as alarming as it may seem. Nevertheless, a sustained trade surplus is not sustainable and a solution is needed. Hopefully, the solution is in the form of increasing American exports to China, as opposed to curtailing imports from China. Increased trade would create jobs and growth, benefiting both countries.

Why the US needs China to succeed, and vice versa

This is the basic economics proposition that we hope appeals to Trump’s chief trade adviser Peter Navarro, the former economics professor from University of California, Irvine and the current director of the White House National Trade Council. This is the person who is likely to lead trade negotiations with China.

Professor Navarro has published books critical of China and even directed a documentary fantasising about war with China. His trade theory embedded in these publications is generally seen as a fringe view by the mainstream academic economics community in the US. Setting aside rhetorical sensationalism, Navarro would better serve American interests by pushing exports to China for products like maize, soybean, beef, pork and poultry. US hi-tech exports in areas of energy and medicine will also have a great market in China. Service exports have tremendous potential. That means making it easier for Chinese tourists to stay and even buy real estate, and for Chinese students to study in American higher education institutions.

And, finally, there are things the US can do to alleviate the capital account imbalance. What is now going to American shores is not just returning American capital but also Chinese capital, too. That means it would be in America’s interest to be receptive to direct investment from China, which will contribute to creating American jobs and economic growth.

John Gong is professor of economics at the University of International Business and Economics, Beijing. [email protected]. Yabin Wu is executive dean of the Research Institute for Global Value Chains at the university. [email protected]