Lighthizer Set to Defend Trump’s Rocky Path Toward Trade Nirvana

It was a little over three years ago that U.S. Trade Representative Robert Lighthizer spoke at a gala dinner in Washington attended by the leader of Vietnam and politely mentioned how a widening trade imbalance between the countries needed to be addressed.

“This concerning growth in our trade deficit presents new challenges and shows us that there is considerable potential to improve further our important trade relationship,” Lighthizer said at the U.S. Chamber of Commerceevent in May 2017, just a few weeks after he was sworn in. “Prime Minister Phuc is uniquely positioned to help us achieve that objective.”

With just five months left in the Trump administration’s first term, the U.S.’s goods trade deficit with Vietnam was 63% wider in the first four months of 2020 than it was during the same period in 2017. The Covid-19 pandemic wasn’t the main culprit: The U.S. imported $55.8 billion more in goods than it exported to Vietnam in 2019, a 41% jump from a year earlier.

Vietnam’ssurging shipments to the U.S. illustrate how under Lighthizer’s stewardship, President Donald Trump’s trade strategy — one focused mainly on reducing American reliance on Chinese imports — has to some degree just shifted production to places like Vietnam and Mexico, whose trade surplus with the U.S. has surged about as much as Vietnam’s since 2017.

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So as Lighthizer prepares to testify at two congressional hearings Wednesday on the Trump administration’s post-pandemic trade agenda, his push for a so-called decoupling from China begs the question: Which countries gain if China eventually loses out? And it’s also worth looking at the evolution of the U.S.’s economic relationship with China and asking if some of those ties are too hard, or costly, to unwind.

The Great Decoupling? What’s Next for U.S.-China Rift: QuickTake

Trade and investment has underpinned the U.S.-China relationship since at least the early 1990s. From 1979, when Communist-era ties were established, to 2018, trade in goods grew more than 250-fold, rising to $633.5 billion from less than $2.5 billion in 1979, according to awhite paper from China’s government last year.

Much of China’s imports were of food and agricultural goods, as well as high-tech manufactured products like airplanes or computer chips. The U.S. imported an increasing amount of factory-made end products -- everything from shoes and clothes to steel, computers and iPhones.

However, the trade war of 2018 and 2019 and the reciprocal tariffs each side placed on the other have dented that.

Though progress in the trade negotiations in the last quarter of 2019 helped reduce tensions, the coronavirus outbreak has posed a challenge for China to live up to the purchase commitments it made in the deal signed in January. In the first five months of 2020, China’s imports from the U.S. fell 7.6% from a year ago, while exports shrank 14.3%.

In services, the increasing wealth of China’s citizens had led to surging trade in tourism and education, with the U.S. the largest overseas destination for Chinese students, according to the same white paper. Two-way trade in services rose to $125.3 billion in 2018 from $27.4 billion in 2006 when data begins, although the Covid-19 outbreak will damage that, as both nations have shut their borders.

Despite the recent resurgence of bilateral tensions, some in China are still optimistic about the possibility of economic cooperation.

“Objectively, Covid-19 has impacted the implementation of this deal. But even under such circumstances, China has been emphasizing the two sides should work together to implement the deal,” Zhu Guangyao, counselor to the State Council and former vice minister of the Ministry of Finance, said at a meeting with reporters last week.

Meanwhile, U.S. investment into China has been remarkably resilient so far, considering all the tension and intermittent pressure from the U.S to decouple from China. Investment flows actually rose in 2019, and at $2.3 billion in the first quarter of 2020, it was only slightly lower than the quarterly average of $2.8 billion in 2019.

However, there’s been a slump in money flowing the other way, with only $200 million in Chinese investment in the U.S. in the first quarter, one-tenth the quarterly average last year. Some of that likely reflects the general trend of shrinking overseas investment by Chinese firms, although increasing tensions, and rising scrutiny and restrictions on where Chinese firms can invest also likely plays a part.

The pandemic-related deterioration in diplomatic relations hasn’t done much to companies willingness to operate in China. More than 70% of 25 large U.S. firmssurveyed in March by the American Chamber of Commerce in China said they had no plans yet to relocate production and supply-chain operations or sourcing outside of China due to Covid-19. There’s also the question of whether European companies are considering leaving China, and theearly evidence suggests they won’t be in any major way.

Why the U.S. Can’t Easily Break China’s Grip on Supply Chains

“China’s attraction as an export base will decline but the degree to which it does will be sector-specific. Some sectors, such as cars, have pretty entrenched supply chains. Others may be less entrenched,” said Simon Evenett, a professor at the University of St. Gallen in Switzerland. But “business strategies will keep plenty of western companies in China, aiming to supply the growing local market. That won’t change.”

— With assistance by James Mayger, Miao Han, Lucille Liu, Zoe Schneeweiss, and Ana Monteiro

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