These Six Issues Are Key to Trade Peace for the U.S. and China

(Bloomberg) -- President Donald Trump has sent his top economic advisers to China to discuss trade, a trip the president says has a “very good chance” of yielding a deal. But the two countries clash on everything from car tariffs to basic economic philosophy.

Here’s an overview of some of the big issues on which they disagree:

Technology

It’s often lost in the noise, but the trade row began as a dispute over technology. Last year, Trump asked U.S. Trade Representative Robert Lighthizer to probe China’s treatment of U.S. intellectual property. In a 215-page report, USTR concluded China violates American IP in a variety of ways, prompting Trump to propose tariffs on up to $150 billion of Chinese imports. A major source of friction is President Xi Jinping’s Made in China 2025 plan, which seeks to establish the nation as a global leader in everything from robotics to electric cars.

But Xi’s government has pledged to give foreign companies more access to its manufacturing sector, and it argues China has the right to use technology as a springboard for economic growth, just as other developing nations have done.

Steel Overcapacity

Even before Trump came to office, the U.S. accused China of flooding the world with metals at prices below fair-market value. China was the prime target of global steel and aluminum targets imposed in March by Trump over U.S. national security grounds. The world’s biggest steel producer churned out 832 million metric tons last year while consuming 737 million metric tons, according to the World Steel Association. To put those figures in perspective, that gap is bigger than the combined steel output of Germany and France.

If China agrees with the U.S. on anything, it’s that the Asian nation has a steel overcapacity problem -- it has been cutting production and is aiming for further reductions over the next few years, and is imposing stricter rules on the industry.

Market Access

The U.S. argues that American companies don’t compete with their Chinese counterparts on a level playing field. China levies a 25 percent tariff on passenger cars, for example. The U.S. collects a duty of 2.5 percent on imported cars. It’s also harder for American companies to invest in China.

While Trump’s proposed tariffs have gained most of the attention, the administration is also looking at ways to crack down on Chinese investment in the U.S. in an effort to balance the scales and protect sensitive technology.

Despite still placing almost last among countries in a global ranking of openness to foreign direct investment, China believes it’s come a long way by developing-nation standards. Xi promised a “new phase of opening up” last month, and officials then announced steps to open up the financial sector and auto tariff cuts.

U.S. Trade Deficit

Trump has repeatedly complained about the trade deficit with China. The gap in goods and services hit $337 billion last year, accounting for more than half of America’s total shortfall. The president has asked Beijing to reduce the gap by $100 billion.

The Chinese are fond of saying the deficit can be narrowed if the U.S. eases restrictions on technology exports to China, and they point to the nature of the global supply chain: China imports parts to assemble and ship to the U.S., which exaggerates the size of the trade gap.

China’s State-Driven Economy

Economists say the trade imbalance will remain unless there’s a change in the deeper dynamics of the two economies. To close the gap, Americans would need to save more, while the Chinese would need to spend more. But that may require a major shift in Beijing’s economic model, which has historically relied on exports and state-directed investment to drive growth. China has been gradually ramping up consumption and buying more foreign goods, but the U.S. wants it to move faster.

The Trump administration last year rejected Beijing’s bid to have China classified as a “market economy.” The state’s pervasive role in markets creates “fundamental distortions” in China’s economy, the U.S. has said.

In 2013, China said it would allow markets to play a key role in resource allocation. Still, Xi’s push for more dominant state-owned enterprises undermines that objective, and the ruling Communist Party’s grip on the state sector is getting tighter. Xi also has set himself up to rule indefinitely and has overseen sweeping government overhaul that gives the party greater control over everything from financial services to manufacturing to entertainment.

Currency Manipulation

Trump promised during the 2016 election campaign to label China a currency manipulator. Since taking office, he has refrained from doing so. In its latest currency report, the Trump administration stepped up criticism of China’s lack of progress in rectifying the trade imbalance. Trump in April accused China, along with Russia, of gaming their currencies.

China does steer its currency -- just not in the way the Trump has accused it of doing. The People’s Bank of China keeps the yuan within a daily trading band against the dollar. In 2015 and 2016, China burnt through some of its reserves to prop up the currency, not weaken it.

--With assistance from Joe Deaux

To contact Bloomberg News staff for this story: Andrew Mayeda in Washington at amayeda@bloomberg.net, Xiaoqing Pi in Beijing at xpi1@bloomberg.net.

To contact the editors responsible for this story: Sarah McGregor at smcgregor5@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Andrew Mayeda, Xiaoqing Pi