Trump Cedes Trade Leverage to China in His Quest for Kim Summit

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(Bloomberg) -- North Korea may turn out to be Chinese President Xi Jinping’s greatest ally in negotiating a trade deal with President Donald Trump.

As Trump heads toward a high-stakes summit with North Korean leader Kim Jong Un next month, the president will look for all the help he can get, especially from Beijing — Pyongyang’s closest ally. That’s giving China added leverage in simultaneous talks with the Trump administration aimed at averting a trade war. 

While the U.S. has tried to keep the two issues on separate tracks, a sudden volley of harsh rhetoric this week from North Korea is stirring suspicion in the Trump administration that China may be trying to connect them, as the president suggested on Thursday.

“For various reasons, maybe including trade,” Trump told reporters. “President Xi could be influencing Kim Jong Un.”

Despite China’s support of broad United Nations sanctions against the country, North Korea relies on its neighbor to hold up its economy. They share a border of more than 800 miles, and China accounts for about 90 percent of North Korea’s trade, according to data from the International Monetary Fund. 

That provides Xi enormous influence over Kim. The North Korean leader has visited China twice in recent months, his first known visits to a foreign country since he took power.

“If we expect China to cooperate on that important issue, we can’t punch them in the nose on trade issues,” said David Dollar, a senior fellow at the Brookings Institution who was the U.S. Treasury’s economic emissary to China during the Obama administration.

“When you bring in the North Korea factor, it becomes overwhelmingly sensible to make a trade deal with China,” he said.

Trump suggested Thursday that the seeds for Pyongyang’s recent warnings against the U.S. were planted in a meeting between Kim and Xi on May 8. “All of the sudden, out of nowhere, Kim Jong Un went to China to say hello, again, a second time, to President Xi,” Trump said.

The president later in the day met with Chinese Vice Premier Liu He, who’s in Washington for trade talks. After their meeting concluded, a Trump administration official said that China had offered to reduce its annual trade surplus with the U.S. by $200 billion.

On Friday in Beijing, China ended an anti-dumping and anti-subsidy inquiry into American sorghum imports. It’s unclear what the U.S. may have offered in return.

U.S. Treasury Secretary Steven Mnuchin has been simultaneously charged with carrying out Trump’s campaign to pressure Pyongyang to abandon its nuclear weapons program through economic sanctions, and playing an influential role in the China trade talks.

He led a delegation earlier this month to Beijing, and one of his goals was to show the Chinese respect as the two nations try to deal with North Korea, Bloomberg News reported last month.

Mnuchin also has a softer view on trade issues than hard-liners in the White House such as trade adviser Peter Navarro.

“While Trump has a bias towards action against China on trade, Mnuchin and other so-called ‘globalists’ in the administration appear to be using Trump’s overwhelming desire to reach a deal with North Korea in an effort to moderate the scope of trade action Trump decides to take against China,” said Stephen Myrow, managing partner at Beacon Policy Advisers in Washington.

China has shown itself ready to exert pressure on Trump’s political base. Of the 10 states that face potential Chinese retaliatory tariffs on more than $1 billion of their exports, seven backed Trump in 2016, according to a report by the American Action Forum, a Washington-based group that opposes protectionist trade policies.

Trump himself has linked disputes with China to the North Korea dilemma. In a tweet last month, he asked, "Why would I call China a currency manipulator when they are working with us on the North Korean problem?"

Beijing’s offer of a trade surplus reduction may be a step toward an eventual agreement, but the divide between the U.S. and China over trade remains wide even as talks with North Korea approach a critical phase.

“It’s going to get tough from here. It looked like it was moving pretty smoothly but there has to be a very serious negotiation and there are pretty wide gaps and there is not a lot of time” before Trump’s June 12 summit with Kim, said Victor Cha, who was previously under consideration to become Trump’s ambassador to South Korea. Cha reportedly withdrew his interest after privately expressing disagreement with Trump’s North Korea policy.

©2018 Bloomberg L.P.

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