Trump’s China Bashing can be harmful to US Business and Consumers

August 29, 2017

Trump’s China Bashing can be harmful to US Business and Consumers

by Stephen S. Roach*

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

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Seemingly at odds with the world, US President Donald Trump has once again raised the possibility of a trade conflict with China. On August 14, he instructed the US Trade Representative to commence investigating Chinese infringement of intellectual property rights. By framing this effort under Section 301 of the US Trade Act of 1974, the Trump administration could impose high and widespread tariffs on Chinese imports.

This is hardly an inconsequential development. While there may well be merit to the allegations, as documented in the latest “USTR Report to Congress on China’s WTO Compliance,” punitive action would have serious consequences for US businesses and consumers. Like it or not, that is an inevitable result of the deeply entrenched codependent relationship between the world’s two largest economies.

In a codependent human relationship, when one party alters the terms of engagement, the other feels scorned and invariably responds in kind. The same can be expected of economies and their leaders. That means in a trade conflict, it is important to think about reciprocity – specifically, China’s response to an American action. In fact, that was precisely the point made by China’s Ministry of Commerce in its official response to Trump’s gambit. China, the ministry vowed, would “take all appropriate measures to resolutely safeguard its legitimate rights.”

Caught up in the bluster of the US accusations being leveled at China, little attention is being paid to the potential consequences of Chinese retaliation. Three economic consequences stand out.

First, imposing tariffs on imports of Chinese goods and services would be the functional equivalent of a tax hike on American consumers. Chinese producers’ unit labor costs are less than one fifth those of America’s other major foreign suppliers. By diverting US demand away from Chinese trade, the costs of imported goods would undoubtedly rise sharply. The possibility of higher import prices and potential spillover effects on underlying inflation would hit middle-class US workers, who have faced more than three decades of real wage stagnation, especially hard.

Second, trade actions against China could lead to higher US interest rates. Foreigners currently own about 30% of all US Treasury securities, with the latest official data putting Chinese ownership at $1.15 trillion in June 2017 – fully 19% of total foreign holdings and slightly higher than Japan’s $1.09 trillion.

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In the event of new US tariffs, it seems reasonable to expect China to respond by reducing such purchases, reinforcing a strategy of asset diversification away from US dollar-based assets that has been under way for the past three years. In an era of still-large US budget deficits – likely to go even higher in the aftermath of Trump administration tax cuts and spending initiatives – the lack of demand for Treasuries by the largest foreign owner could well put upward pressure on borrowing costs.

Third, with growth in US domestic demand still depressed, American companies need to rely more on external demand. Yet the Trump administration seems all but oblivious to this component of the growth calculus. It is threatening trade sanctions not only against China – America’s third-largest and fastest-growing major export market – but also against NAFTA partners Canada and Mexico (America’s largest and second-largest export markets, respectively). As the reactive pathology of codependency would suggest, none of these countries can be expected to acquiesce to such measures without curtailing US access to their markets – a counter-response that could severely undermine the manufacturing revival that seems so central to the Trump presidency’s promise to “Make America Great Again.”

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In the end, China’s economic leverage over America is largely the result of low US domestic saving. In the first quarter of 2017, the so-called net national saving rate – the combined depreciation-adjusted saving of businesses, households, and the government sector – stood at just 1.9% of national income, well below the longer-term average of 6.3% that prevailed over the final three decades of the twentieth century. Lacking in saving and wanting to consume and grow, the US must import surplus saving from abroad to close the gap, forcing it to run massive current-account and trade deficits with countries like China to attract the foreign capital.

It is sheer political chicanery to single out China, America’s NAFTA partners, or even Germany as the culprit in a saving-short US economy. Fostering policies that encourage an economy to squander its saving and live beyond its means makes trade deficits a given – as are the seemingly unfair trading practices that may come with this Faustian bargain for foreign capital.

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Let Good Sense Prevail

The US ran trade deficits with 101 countries in 2016 – a multilateral external imbalance rooted in America’s chronic domestic saving problem. The fix for this problem cannot be made in China. Ironically, with the Trump administration’s policies likely to lead to larger budget deficits that put national saving under additional downward pressure, the need for Chinese and other foreign capital will actually intensify and the codependency trap will only close more tightly.

America does not hold the trump card in its economic relationship with China. The Trump administration can certainly put pressure on China, and, on one level, there may well be good reason to do so. But deep questions concerning the consequences of such pressure have been all but ignored. Getting tough on China while ignoring those consequences could be a blunder of epic proportions.


APEC as a Tool to Engage North Korea for Regional and Global Peace

August 24, 2017

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Number 393 | August 23, 2017

APEC as a Tool to Engage North Korea for Regional and Global Peace

by Robert L. Curry

Is it possible for Asia-Pacific leaders to engage North Korea’s regime productively? If so, by what institutional mechanism might engagement take place? Since the most likely response to the initial question is no, why think about a mechanism by which the engagement process might begin?

Despite this common assessment, the perilous and declining environment that the North Korean government is creating strongly suggests that regional leaders should be alert for any sign from the regime that it is open to engagement. In the event that a promising sign shows up, it makes sense for diplomats, security professionals and other specialists to think about how to respond. In fact, the more dangerous and threatening the North Korean government becomes, the more urgent it is for leaders to look for and find a de-escalatory way to deal with the regime. Finding one will not be easy, but trying is essential, because despite decades of sanctions and isolating initiatives, North Korea is becoming more aggressive. Recently there have been signals that the regime is close to taking irrational and destructive action.

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The current environment exists largely because the regime has remained immune to moderation. Nothing has worked. China’s attempt at intervention has limits; military action against the regime would be complex and risky; and there is little hope for near-term regime change. At present, no other option is being discussed because nothing appears plausible or workable. However, under certain conditions, the regime might be ready for multilateral engagement. This is a “long shot,” but conditions could become bleak enough to force the regime to consider engagement. The Asia-Pacific Economic Cooperation (APEC) holds the potential to be a mechanism of such engagement. It’s the type of institutional affiliation North Korea needs. APEC would be a reasonable, modest, and low-risk initial step to take on the road out of isolation.

The conditions that may compel North Korea’s leadership to move towards diplomatic engagement include the following: (a) the policy of nuclear and ballistic testing and development aimed at the “outside” is costly, not yielding sufficient benefits and is dangerous; (b) in response to the tests, the “outside” is imposing economic and financial sanctions that are impairing the economy’s capacity to function and the public sector to operate; (c) the “outside’s” military response to North Korea’s actual use of its nuclear and ballistic capacities would be so devastating that it would leave the regime and the country in ruins; (d) the magnitude of the economy’s failings are so acute that even with China’s assistance, dealing with them requires resources from the “outside”; and (e) while China wants neither a failed state at its southern border nor a flood of refugees crossing it, its government has other objectives and cannot continue to provide the level of financial and economic assistance needed by the regime.

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 Regional and Global Peace is Possible,
“The scope of APEC’s programs fits nicely with North Korea’s needs as it struggles with resource shortages, infrastructure frailties, supply chain interruptions… APEC stays clear of territorial and other disputes.”–Robert L. Curry

Such calculations on the part of Pyongyang might compel the regime to think about engagement. APEC would be a useful and plausible option because its focus is on assisting member economies to strengthen their capacities to develop economically, to mature their private sectors, to benefit from industrial technology transfers, to be a party to regional cooperation, and to receive the benefits of trade expansion. Importantly, the scope of APEC’s programs fits nicely with North Korea’s needs as it struggles with resource shortages, infrastructure frailties, supply chain interruptions, impaired labor and managerial attributes, distributional inequities, a low level of national and personal income, and one of the world’s lowest levels of  human development.

APEC’s structure and conditions of membership also fit North Korea’s needs. APEC limits its actions to economic cooperation and development, and avoids entangling in the affairs of member economies (or sovereign states). APEC stays clear of territorial and other disputes among states and imposes no strict conditions of membership. The way it works would give some time for North Korea to adjust to engagement on a partnership basis.  North Korea would necessarily begin as an official observer. Gaining full membership would come later and getting there would not be an easy journey. Numerous political and legal obstacles and long-held opinions would stand in the way.  However, if these obstacles could be overcome, both North Korea and the “outside” might benefit.

The journey can only take place if North Korea choses to move out of isolation and at the same time the “outside” agrees with the move. This would require openness to contacts, associations and discussions for which APEC would be helpful. North Korean officials could observe and become familiar with the professionals who work in topic-based APEC committees. For example, they would learn about APEC’s Individual Plan of Action program. Each member economy’s Plan takes place in two steps: in year one, the Plan is designed with the assistance of APEC-based specialists and technical professionals. The goal is to identify critical shortcomings and design ways to overcome them. In year two, each member economy reports on the progress that it has made since year one.  By repeating the process, over time each member economy is able to move along a path leading to economic growth and development. A similar effort by the North Korean government would be extremely valuable. It would require the regime to think clearly about how to achieve genuine economic progress with the help of the “outside.”
At some point the regime will need to make this fundamental a decision: either cling to its nuclear/ballistic programs even though its outputs likely will never be used, or move away from the programs to some degree while moving in the direction of multilateral engagement with its Asia Pacific neighbors. APEC could be a place to start.
About the Author

Robert L. Curry, Jr. is Professor Emeritus of Economics at CSU Sacramento and former Lecturer in Economics at the University of Hawaii, Manoa. He can be contacted at


The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

APB Series Editor: Dr. Satu Limaye, Director, East-West Center in Washington
APB Series Coordinator: Peter Valente, Project Assistant, East-West Center in Washington

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue. Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.