Trump Closes Era of Constructive Economic Engagement With China

(Bloomberg) -- The U.S.’s era of constructive engagement with China on economic matters is over.

That was the message as President Donald Trump ordered tariffs on Chinese imports worth $50 billion and investment curbs on Chinese companies. After nearly half a century of trying to woo China into the club of major market-based economies, Trump made clear his administration plans to brandish sticks, not carrots, to achieve U.S. trade goals with Beijing.

The question is whether the gambit will lead to a healthy rebalancing of the world’s two biggest economies, or trigger a punishing trade conflict that sideswipes the broadest worldwide expansion in years.

“We’re in a very precarious moment,” said Orville Schell, director of the Center on U.S.-China Relations at the Asia Society. “The U.S. has never pushed back to this degree. We don’t know if this will be a constructive or destructive move.”

So far, investors appear to fear the latter. U.S. stocks fell the most in six weeks amid concerns the U.S. tariffs will provoke China to retaliate. “We don’t want a trade war but we are not afraid of it,” said China’s ambassador to the U.S., Cui Tiankai. “If people want to play tough, we will play tough and see who will last longer."

Hours later came the inevitable counter punch: China’s Commerce Ministry on Friday said it plans a 25 percent tariff on U.S. pork imports and recycled aluminum, and 15 percent tariffs on American steel pipes, fruit and wine.

“This seems to be the beginning of an era of reversing globalization,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “If that is true, the impacts to the Chinese economy, to the Sino-U.S. relationship, to the global economy and to the world prospects could be huge.”

China Engagement

With his landmark visit to China in 1972, Richard Nixon set the U.S. on a path of using diplomacy to convince Beijing to open the Chinese economy to market forces and play by the rules of the American-led world order.

China took a major step toward integrating into that order in late-2001, when it joined the World Trade Organization, a move supported by the Clinton administration.

Trump Closes Era of Constructive Economic Engagement With China

After years of much talk and little action, Trump officials say Beijing hasn’t lived up to promises to deliver economic reforms, making it necessary a more forceful approach. On intellectual property, China repeatedly failed to act on U.S. concerns about practices such as forcing U.S. companies to transfer technology to Chinese firms, an official from the U.S. Trade Representative’s office said this week.

‘Seismic Shift’

The China tariffs mark a “seismic shift from an era dating back to Nixon and Kissinger, where we had as a government viewed China in terms of economic engagement," White House trade adviser Peter Navarro told reporters Thursday. “That process has failed."

U.S. frustration with China reached an inflection point in 2005, when then-Deputy Secretary of State Robert Zoellick famously urged a country that at the time had economic growth of around 10 percent to become a “responsible stakeholder” in the world economy. Since then, Treasury secretaries from Henry Paulson to Jack Lew tried the diplomatic approach on everything from China’s policies on currencies to financial-services liberalization.

The patience wore out with Trump, who as a presidential candidate in 2016 vilified China and blamed it for the ills that had befallen American manufacturing workers.

In his announcement on Thursday, Trump hinted the U.S. might be open to negotiations, noting he has a “great relationship” with President Xi Jinping. “I have tremendous respect for President Xi,” the president said before signing the executive memo ordering the tariffs. “They’re helping us a lot in North Korea.”

Failed Talks

It’s not clear what the forum for those negotiations would be. For years, officials from both countries met once a year for economic talks, under a process that came to be known as the Comprehensive Economic Dialogue. Last year, the Trump administration’s first round of such talks ended without both sides being able to agree on a statement.

A top Treasury official corrected himself this month after saying the U.S. had ended the formal economic talks with China. The U.S. insists Treasury Secretary Steven Mnuchin continues to hold “high-level talks” with China.

Whether constructive engagement is even possible now is an open question.

“This is a very dangerous course. We’re in uncharted territory,” said C. Donald Johnson, a former congressman from Georgia who worked at USTR under Clinton. “Whether they’re just doing this, like many things President Trump does, as a way to get leverage in negotiations, we’ll see. But if it’s not a bluff, we’re going to see a trade war.”

©2018 Bloomberg L.P.