Having Failed to Clinch a Deal With North Korea, Trump Turns to China

President Donald Trump is already planning a signing ceremony for next month for what he touts as a big trade deal with China. But will the unfinished trade agreement with Beijing, like Trump’s out-with-a-whimper summit in Vietnam with North Korean leader Kim Jong Un, turn out to be a dud?

It’s hard to know exactly where things stand between the United States and China after several months of negotiations. While Trump says the two sides are “very, very close” to a deal, U.S. Trade Representative Robert Lighthizer told Congress Wednesday that “much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached.”

On Thursday, White House economic advisor Larry Kudlow dialed up the expectations, trumpeting what he called a “historic” deal in the making, including far-reaching commitments by China to limit the state’s role in the economy. Just minutes later, U.S. Treasury Secretary Steven Mnuchin tried to tamp down expectations. “The deal is not done yet, but we’ve made a lot of progress,” he said.

One problem is the administration’s—and especially the president’s—tendency to hype modest reforms as major achievements. Trump touted a few tweaks to the existing trade deal with South Korea as a “brand-new agreement,” for example, and he has tried to present a slightly modified North American Free Trade Agreement as a historic breakthrough.

“The president is relentlessly uninformative about these things,” said Phil Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs. “He told us with NAFTA, ‘It’s the biggest deal ever,’ for what was essentially a minor rewrite.”

In almost two years of talks with China, one important factor has been an internal administration divide between those who want to crack down on Beijing’s abusive trade practices (such as state subsidies and stealing foreign technology) and the dominant role of the state in the Chinese economy and those who fixate on the bilateral trade balance and basically just want to export more U.S. commodities such as soybeans and natural gas.

The president is clearly on one side of the argument.

“Trump has no interest in China making deep structural reforms. He just wants them to buy more stuff,” said Derek Scissors, a China expert at the American Enterprise Institute. Trump’s desire to secure any sort of agreement with China, even one that falls short of what his own trade experts are pushing for, helps explain his decision over the weekend to suspend the threat of additional tariffs on China due to start in March—the main source of leverage Washington had to force concessions from China.

“He gave up on the March 1 deadline in November. He said he wanted a deal. Since then, the talks have been fake,” Scissors said.

The biggest question around whatever emerges between the two countries is the extent of structural reforms that China agrees to make. Since last year, Washington has been pressuring Beijing to make fundamental changes in how it manages its economy, by lessening the role of the state, curbing the theft of intellectual property, opening up new markets, and throttling back plans to use state power to create Chinese giants in emerging fields such as semiconductors and artificial intelligence.

Kudlow on Thursday suggested that China was considering making big concessions in areas including state subsidies and currency manipulation—but conceded that Chinese President Xi Jinping and other top leaders would still have to sign off on such a deal. Mnuchin also stressed the need for structural reforms but suggested there was still a lot more work to be done.

If the United States fails to fix two decades of problematic Chinese economic behavior, it might be because negotiators were given a three-month window to address issues that have festered for four presidential administrations.

“You say you want deep reforms, and you say you want to do it in 90 days, including three major holidays,” said Levy, who served as a trade advisor to President George W. Bush. “That’s stacking the deck against deep reform.”

A more fundamental issue might be the structure of the Chinese economy—especially after six years with Xi at the helm, consolidating power in Beijing and centralizing the government’s role in the economy.

“We are telling Xi, ‘You have to give up state control of all these things’—and he’s not going to do it. We are not dealing with anyone who has any interest in reform,” Scissors said. In order to push Beijing to make concessions, he said, the United States would have to be willing to accept some short-term pain, such as the economic harm that tariffs inflict on U.S. producers and consumers, lost export markets for U.S. farmers, or a potential fall in U.S. stock market indices.

“We have to be willing to pay costs in order to coerce them into making structural reforms, and we aren’t,” he said. Even the areas that the administration says it is working to fix—financial services, intellectual property protections, and the like—don’t address the fundamental challenge to American workers posed by China’s export-powered economy, Scissors said.

“This is a sellout of industrial workers and a gift to Wall Street,” he said.

Even if the two sides do reach a deal next month, that won’t entirely end the trade war. Trump has suspended, for now, the threat of additional tariffs on Chinese goods—but has left in place the 10 percent tariff on hundreds of billions of dollars’ worth of Chinese exports. Also in place, for now, are China’s retaliatory measures, including a precipitous decline in the purchase of U.S. agricultural goods. Taken together, that means that the groups in the United States feeling the pain from the trade war—including manufacturers who have to pay more for the intermediate goods they need to make finished products and the farmers pining for lost markets—will keep on feeling it.

“When do those groups get relief?” Levy asked. “At what point do they say, ‘It’s been a little while, and there’s no end in sight, and we’re suffering here?’” He suggested that continued pain from Trump’s tariffs could nudge Congress to take action to rein in the president’s ability to slap levies on major U.S. trade partners without any input from lawmakers.

But Congress’s role in any China trade deal is a lot more uncertain. Lighthizer told the body on Wednesday that it wouldn’t have any vote on the agreement. Whatever deal the two sides eventually come up with, Lighthizer said, the administration considers it a remedy to Chinese trade abuses that opened the door to tariffs in the first place under a so-called Section 301 investigation. It’s not a trade deal that Congress can vote on, in other words.

But if the pending agreement with China is, in Kudlow’s words, “historic,” it’s hard to see how Congress could be cut out of the loop entirely.

“Substantively, the agreement is either fake or it absolutely calls for a congressional role,” Scissors said. “From an economic point of view, it’s much more important than the U.S.-Mexico-Canada Agreement [which Congress does have to approve]. It’s either fraud or they have to get congressional approval on substantive grounds.”

If the two sides do reach some sort of agreement, perhaps next month at Trump’s Mar-a-Lago property in Florida, it is likely to disappoint a broader group of China hawks in Washington who had finally seen bipartisan consensus about the need to push back against Beijing’s abuses and who saw the trade war as a rare opportunity to force China to make concessions.

There’s particular unease over the administration’s apparent willingness to use Huawei, a big Chinese telecom-maker in the crosshairs with Washington for the security threat posed by its technology, as a bargaining chip to sweeten some sort of trade deal. Trump has recently downplayed the idea of banning Huawei technology, even as U.S. officials strong-arm allies to ban the telecom giant. And last week Trump suggested that criminal charges against a Huawei executive could be dropped as part of a trade deal.

China hawks in the national security community “aren’t going to stand down so easily. [They’ll say,] ‘No, wait a second, we just got serious, and you didn’t fix it,’” Levy said. “That’s especially true if you see leniency toward Huawei.”