Can Trump's Trade War General Make Peace?

(Bloomberg Opinion) -- “Trade alone cannot douse the flames of international rivalry. In fact, prosperity often contributes to conflict.”

That’s how U.S. Trade Representative Robert Lighthizer once characterized the risks of allowing China to join the World Trade Organization.

The two decades since he wrote those words have certainly brought prosperity: China is now more than seven times wealthier than it was in 1997, and U.S. per-capita GDP has almost doubled. But, much as he predicted, growth hasn’t encouraged China’s leaders to respect domestic human rights or international obligations. When the economies of Germany and Japan boomed in the late 19th century, it was the prelude not to peace, but to war, he wrote: “It is foolish to think that more trade between the United States and China will resolve the political tensions between us.”

Can Trump's Trade War General Make Peace?

With a trans-Pacific trade war now threatening to shave 0.4 percentage point off global economic growth and 0.9 percentage point from the U.S., Lighthizer is now the man tasked with resolving those tensions ahead of a “hard deadline” of March 1. The question is whether he believes such a resolution is possible, or even desirable.

It’s a job that in many ways he’s been preparing for all his life. He was raised in Ashtabula, Ohio, a Great Lakes port town that rose and then fell – and fell – with the fortunes of the U.S. steel industry. After helping craft President Ronald Reagan’s 1981 tax cuts, he was made deputy trade representative and helped negotiate the series of voluntary export restraints that saw Japanese manufacturers agree to caps on sales of key products to the U.S.

The parallels with that era are striking. As is the case now, the U.S. was experiencing widening trade deficits thanks in part to a strong dollar and rising interest rates. Protectionist sentiment was on the rise. Washington’s greatest economic threat was felt to be an Asian nation with a trade-oriented manufacturing sector and a rapidly aging population. That Reagan-era showdown was followed by a generation of decline for Japan. Could a similar confrontational approach repeat the trick with China?

Can Trump's Trade War General Make Peace?

Those who know Lighthizer describe a man mentally in line with President Donald Trump’s way of thinking on China, perhaps more even than Trump himself. He also has a talent for producing agreements that are limited enough to be acceptable to America’s trading partners, but sizable enough to be signed off by his trade-skeptical boss.

Those skills will be crucial over the coming months. Getting Beijing to the negotiating table is an achievement that many (including this columnist) doubted would pay off as well as it has. 

Over the past year China has loosened foreign-investment bars on manufacturing cars, ships and aircraft; allowed foreign companies to build and operate power grids, railways and gas stations; and paved the way toward opening up the financial services sector too. A comprehensive set of new penalties for intellectual-property infringements has raised the prospect of real change in that notorious area, while the industrial-policy ambitions of the Made in China 2025 program may be deferred. Premier Li Keqiang has even floated the idea of winding back forced technology transfers, a bugbear for foreign investors.

At the same time, the success of this year’s trade agreements with South Korea, Mexico and Canada seems bound up with the fact that the deals were essentially minor revisions to existing pacts. In the case of China, both Trump and Lighthizer himself appear to want something much more comprehensive.

Furthermore, the problem in dealing with Beijing has never been about extracting promises, but ensuring they’re carried out. That goes to the heart of the challenges that Washington’s trade diplomacy will face in 2019. Lighthizer’s mastery of trade law and diplomacy, honed in government and in more than 30 years representing the likes of United States Steel Corp. at Skadden, Arps, Slate, Meagher & Flom LLP, isn’t really in doubt. The problem is his control over events.

The Democratic House leadership that will take office next year seems keen to position itself as more hawkish than the Trump administration on China issues, a shift that will make cutting a low-key deal politically hazardous. Beijing is similarly divided, with the modernizers in the Ministry of Commerce still sidelined by statists and President Xi Jinping taking an uncompromising stance. The arrest of Huawei Technologies Co.’s Chief Financial Officer Meng Wanzhou, and Trump’s willingness to link that case to the trade talks, further complicates things.

Meanwhile Lighthizer’s hand is growing weaker with the prospect of a U.S. slowdown and even recession is in the air, while the Federal Reserve continues to raise interest rates. That latter issue, thanks to its effect on the dollar, may be more important to the U.S. trade deficit than anything that Lighthizer can influence.

Finally, there’s the mercurial president who will ultimately decide whether any agreement stands. In striking international deals, trade negotiators typically rely on their confidence about just how far their political masters are prepared to go. Lighthizer doesn’t have that luxury. 

There’s little doubt that if anyone in this administration has the knowledge and skills to make a deal with China stick and end this great-power trade war, it’s probably Lighthizer. The question is: Does he want to?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

©2018 Bloomberg L.P.