just asking questions

Talking to China Expert James McGregor About Trump’s Haphazard Trade War

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With the report that the president considered a tariff on Australian aluminum last week, and his recent threat of a 5 percent levy on all Mexican goods, it’s becoming even more clear that Trump is not operating with a sound, overarching policy on trade barriers. But if Trump’s madman approach to trade negotiation has frustrated politicians and economists in the United States — where the federal government has already signed off on a $16 billion package for farmers smarting from a decrease in Chinese imports — the state apparatus in Beijing appears to be just as flummoxed by America’s irrational actor.

James McGregor, an American author, businessman, and Council on Foreign Relations member who has lived in China for three decades, considers the Trump trade war a danger and an opportunity for both sides, as the normal mechanisms of influence and exchange are falling away. Intelligencer spoke with him about Trump’s strategy, or lack there-of, and the reasons why China might treat this as a pivotal moment in their economic relationship with the U.S., while we are more likely to remain complacent.

To start at the beginning, what does the U.S. want out of a trade war, and what does China not want to give up?

Well the U.S. actually wants China to do away with state capitalism and its industrial policies, while China just wants to move ahead in the way it’s been moving ahead in the past.

Basically it’s Trump’s impression that China is taking advantage of the American trade system, which is partly true. In China, there are state companies and state funds and state regulators who can put products out at prices where companies that have to make money can’t compete. They can control their own markets through their regulators and really hurt foreign companies in this market.

But there’s not a clear path for Trump to move forward. His idea is that America is so powerful that it can bring China to its knees and get China to change its system. Good luck with that one.

You recently said that the U.S. should adopt a “wake up, grow up, compete with China” approach. Could you clarify what that means?

We need to treat this as a Sputnik moment, as an opportunity to re-energize our systems. We’ve been cutting taxes and defunding our government so we don’t have the money for science and technology education. We’re making it harder for foreigners who are studying in America in the hard sciences. Instead, we should be stapling green cards to their diplomas. We need to wake up and compete against China. You’re not going to get China to change its system. But we can push back and make China unsuccessful at what they do. We need to protect ourselves, invest in ourselves, and work with allies. We’ve got all these strengths that we’re dissipating and China is overcoming its weaknesses. Maybe we’ve been rich too long and we’re not hungry enough.

It’s going to be a pretty hard proposition to make China change its system. To be really frank, the Chinese system is working for China better than the American system is working for America. And that’s a real threat, we’ve got to make our system work better.

You were recently quoted by Thomas Friedman, saying that China “instead of reforming and opening, has been reforming and closing.” Could you expand on that concept?

I just returned from Washington and there’s one bipartisan thought in Washington, which is “China is a bad guy.” How did that come about? Over the last decade, China made it harder and harder for foreign companies in their domestic market. When a Chinese company can do what a foreign company does, they start marginalizing a foreign company’s ability to get in a certain market. At the same time, regarding trade deals, if the rules work for China, then they adhere to the terms. If they don’t work for China, they ignore them. The same thing with the WTO.

China has, over time, turned the American business community against itself, which is not easy to do. The American business community was China’s biggest supporter in Washington. Now the prevailing idea is that China is a bad guy and we have to do something about it. But there isn’t a consensus, other than, “Let’s just push back and make them change the system.”

Do you think there’s any merit to Friedman’s claim that only a mad dog president could go head to head with China and make them compromise?

I think you need to go back to 2016 to answer that. If Hillary Clinton were elected, she’d probably push back in different ways, and she probably would have revived the Trans-Pacific Partnership. If you really want to get China to change, TPP would have been a huge incentive, as it was a major trading block that – in order to become part of it, they would have had to conform to.

The unique thing about Trump is that he’s this orange wrecking ball, and the Chinese don’t know how to deal with him. All of their normal strategies — going to the investment bankers, trying to get the business community to do their bidding in Washington — none of that works because he doesn’t care. He’s got an attitude and wants to push back, which has China discombobulated. The unfortunate thing is that it doesn’t look like he’s thought through a strategic endgame. He’s really withdrawn the U.S. from having an economic proposition for the Asia region for a generation maybe.

Does a discombobulated China give the U.S. an upper hand in any capacity, or is it just another unknown variable at this point?

It prevents China from using its normal mechanisms of influence in Washington, through giving enough major corporations enough of a market share that they would lobby for not pushing back on China in D.C. None of that works anymore, so China has been at a loss in how to deal with this guy. China is always looking for strategy and logic, and Trump never gets near either of those things.

Is there a strategy evolving in China, or is it up in the air over there as well?

The Chinese strategy is to treat this like a moment to regroup and protect themselves and to reduce and eventually eliminate their dependence on American technology, and reduce their dependence on American agriculture. If the U.S. won’t treat this like a Sputnik moment, China will. Especially in the actions on Huawei, which is the most important company in China by a factor of 100, because it’s part of China’s geopolitical strategy. If they cut Huawei off from being able to have American technology components at this point, it really hurts the country, but it also demonstrates to Chinese leadership that they better get off that dependence on American tech.

Seems like another point — from the Belt and Road initiative to climate change talks — in which China is leading and America is complacent.

We are in control of ourselves. We have to deal with what China has become and realize they have some advantages and get over our own arrogance.

China has accused the U.S. of economic terrorism. Do you think there’s any truth to that?

That’s just rhetoric, but here’s the real worrisome thing. In China, because of the strong propaganda apparatus and the state control of information, there’s basically nobody in the country that believes China has any blame for what’s going on. There is a belief that China is finally on the rise, and America and the West are doing this to keep China down, to keep China poor. What’s really happening is “you reap what you sow.” All these years of Chinese behavior that have been difficult for companies and countries have added up to a reassessment of Chinese behavior. I don’t know how either political side can reconcile that. Each side believes that the other is at fault in a very strong way.

The real tragic part of this is, our people get along, our kids go to school together, they get married. Our businesses actually work very well together when it’s only businesses, and the governments are not involved. The problem here is that in both capitals we have extremist leaders who are really pushing the differences. It’s all unnecessary, and there could be tragic consequences.

How much pain do you think Trump is willing to endure if the economy really starts to take a hit?

The Chinese have been in America asking people, “When does Trump need a deal for his reelection,” because they look at Trump as only caring about himself. They finally figured that one out. It’s all about his reelection, so I think it depends on Trump’s own calculations, which are hard to figure out — I think he goes by the day. But if the economy and the stock market start to take a hit because of the trade war as we get a little closer to 2020, and he can do a deal and make the stock market rock and roll and make the economy come back as the election approaches, I think that’s a possible route also.

Are there any political implications for President Xi? Not so much direct political consequences, as he’s president for life, but if the trade war begins to impact his ability to create growth, could he see some sort of party dissent?

I think there’s all kinds of risk for President Xi. Remember, he is a strongman leader, he makes all decisions, he cannot make any mistakes, he can’t be showing any weakness and now he has this trade war with the United States. I imagine there’s some conversation at high levels in the party about who lost America. Think about it, they’ve had America exactly where they wanted us. They would steal technology from a major American corporation and the corporation would tell the U.S. government, “Please don’t do anything about it. I don’t want to make China unhappy because I don’t want to lose the market share I have in China. I don’t want the regulators coming in and doing a dawn raid on my company for antitrust or pricing issues.” They were scared of China as much as they were focused on the market.

China had America in a really good position and they overreached. Xi has to keep things going. China has a lot of economic problems with debt and many other things and they have to grow out of their problems. It’s sort of the only solution they have. If the trade war really hits Chinese growth, that’s a problem.

Trump asserts that China has more to lose in a trade war than the U.S. Do you think that’s correct?

There are no winners in a trade war, both sides lose. So who’s going to lose more? It’s hard to say, but my guess is that in the long term it could be the United States, because China is using this as a moment to focus and rally. Xi, a number of months ago, gave a speech in which he said that China has a 15-year long march to take on the United States and overcome. That’s how they’re thinking: “How do we really work together to move ahead because of this?” Meanwhile, leaders in the United States are yelling at each other on cable news everyday

In November 2018, President Xi and Trump came to a sort of detente at the G20 meeting in Buenos Aires. Do you think the June 28-29 G20 could be something of a deadline for the posturing?

They are so far apart now that there’s no way that they’ll come together by then, as far as I can see. My guess is that at the G20 meeting, Trump and Xi will meet and restart discussions. The Chinese and Americans will both have a framework for restarting the talks, and by then they both might be feeling enough economic pain in their own countries that they’ll be motivated to get this on a path toward trying to smooth it out.

Do you see an American exit strategy?

I guess the exit strategy would be to let China come to a deal in which both sides can claim it’s good for them. But it’s difficult to solve all the underlying problems — the differences between the systems, the technology issues. This is going to go on for a long time, but if we have that initial agreement that takes some of the boiling out of it.

Trump announced a 5 percent tariff on all Mexican goods starting June 12 if the country cannot slow the number of migrants entering through the southern border. How would this tariff affect the squeeze the U.S. is already facing?

Just when we need allies to work with on China, Trump’s trying to alienate every country he can. It’s absolutely ridiculous. You’ve got to remember, a lot of these countries have the same problems with China that we do and they would be very ready to work with us if we weren’t spending all of our time trying to push them away. Companies are moving production out of China to Mexico – if they see that Mexico is going to have a tariff they can’t deal with, they’ll have to reconnoiter and focus on Indonesia or Thailand or the Philippines. That business is not going to be coming to America.

This interview has been edited for length and clarity.

China Expert James McGregor on Trump’s Haphazard Trade War