Trump’s approach to trade deficit could change the world

President Donald Trump’s jousting with China to reduce America’s massive trade deficit — $375.2 billion in 2017 — has the potential to fundamentally alter global trade, at a cost to Europe and Asia. Most observers focus on the dyadic relationship and miss the looming earthquake for the rest of the world.  

“We have been ripped off by China, an evacuation of wealth like no country has ever seen before, given to another country that’s rebuilt itself based on a lot of the money they’ve taken out of the United States, and that’s not going to happen anymore,” Trump vowed last week. China, he said, “has become very spoiled. The European Union has become very spoiled.”

{mosads}Chinese Vice Premier Liu He visited Washington last week for negotiations aimed at averting a trade war. China reportedly had a plan to reduce the deficit by $200 billion. But the negotiations concluded without a firm target. In a joint statement, Washington and Beijing agreed to take effective measures to substantially reduce the trade deficit. “China will significantly increase purchases of United States goods and services,” the statement said, including U.S. agriculture and energy exports.

Trump, unlikely to be swayed by anodyne statements, will exert pressure. Contrary to groupthink, it is possible for China to make a big dent in the deficit and build on Trump’s relationship with President Xi Jinping to the advantage of both countries. In addition to the economic benefits, a tactically coordinated reduction of the trade deficit could advance important foreign policy goals for both sides. Here’s how:

First, China imported $11.9 billion worth of crude oil from Iran in 2017. With the United States’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA), China could buy this commodity from the United States instead, giving both sides a win.

Next, China must switch some imports from other trading partners to U.S. suppliers. The deficit cannot be reduced by growing the import pie; it simply must be sliced differently. And, for the United States to gain a larger slice of Chinese imports, other countries must receive a smaller slice.

This could significantly impact the European Union, one of China’s largest import partners. Given the divisions between the European Union and Trump over Iran and other issues, and the European strategy to continue to support the JCPOA, Trump has incentive to persuade the Chinese to switch imports from European to American goods. Aside from any animus, such a switch also offers the most immediate way for China to reduce the trade deficit. American companies are the most direct competitors for European entities in the Chinese market.

In 2017, machinery, manufactured goods and chemicals comprised 85 percent of China’s imports from the European Union. Of this, machinery and vehicles made up 54 percent of all imports; the category included motor vehicles, motor vehicle parts, electrical apparatus, electronic tubes and valves, and other machinery. Another large category is aircraft and associated equipment.

China could source these imports from the United States and make a noteworthy dent in the trade deficit — albeit at significant cost to the European Union. Aircraft purchases could be drastically skewed in favor of Boeing over Airbus, and China’s imports of American automobiles could grow. Europe’s export of telecommunication equipment (China is one of its largest markets) could be severely impacted if China were to choose U.S. equipment. Together, a major shift in these goods could exceed $100 billion — bringing a $200 billion target closer.

To be sure, this will not be easy to accomplish. U.S. companies may not have the current production capacity to support Chinese purchases. But Trump is likely to see under-capacity as a political opportunity. If China commits to buy aircraft, industrial machinery and automobiles from the United States, there would be major investments in production facilities in the Rust Belt — home to the president’s political base. If Trump’s aggressive China gambit alters international trade, it will deliver a windfall for his supporters in the form of jobs, revitalized communities and related benefits. And that could secure Trump a victory in 2020.

It’s clear that China has avenues to reduce the trade deficit without compromising its strategic interests. Obviously, there are downsides — it will jeopardize its relationship with the European Union and old allies such as Iran. Yet China probably will calculate that it has more to gain by staying in the good books of Trump. And the United States must do its part, by calibrating its concerns about national security and intellectual property with regard to high-tech goods and developing mitigating protections rather than banning sales.

Trump’s hardball with China could be the most significant event in trade for the past three decades. It has the potential to restore U.S. primacy and re-order the trading world as we currently know it.

Sandeep Gopalan is a professor of law and pro vice chancellor for academic innovation at Deakin University in Melbourne, Australia. He previously was co-chairman or vice chairman of American Bar Association committees on aerospace/defense and international transactions, a member of the ABA’s immigration commission, and dean of three law schools in Ireland and Australia. He has taught law in four countries and served as a visiting scholar at universities in France and Germany.