Trade Negotiation Between China and the U.S. Required a Steel Spine - But Mnuchin Folded
President Donald Trump dealt himself a strong hand before negotiating with China.
He held three aces. He’d placed tariffs on imported aluminum and steel in response to unrelenting Chinese overproduction. He’d threatened tariffs on $150 billion in Chinese imports in retaliation for theft and forced transfer of American intellectual property. And for trade violations, he’d forbidden U.S. companies to sell parts to Chinese cell phone giant ZTE, forcing it out of business.
And then, inexplicably, his lead negotiator, Treasury Secretary Steven Mnuchin, quickly folded in talks in Washington, D.C., last week. He left two days of negotiations with top Chinese officials with what amounts of an unenforceable letter of intent. The “joint statement” says the Chinese will buy some more American-made stuff, improve its protections for American intellectual property and patents, and remove some barriers preventing U.S. companies from operating in China. But there are no specifics and no enforcement.
In exchange for vague promises, Mnuchin suspended the tariffs. In addition, on Tuesday, the Wall Street Journal reported that the United States and China had reached a tentative deal to save ZTE, despite the fact that ZTE failed to honor an earlier agreement made after it violated trade embargoes against Iran and North Korea.
Now China holds all the aces. It is bragging that it trounced the United States in trade talks. The stock market shot up 350 points Monday on Mnuchin’s assertion that he’d stopped a trade war between China and the United States. And maybe certainty for investors was all Mnuchin, a former Wall Street banker, wanted. But steel stocks slumped Monday. And that’s not what President Trump promised on the campaign trail. It’s not what tough negotiators would have achieved for the United States when it had the upper hand. No potent negotiator would have surrendered that hand for vague promises, especially considering China’s long history of disregarding its trade pledges.
Donald Trump won the presidency in part by connecting with working people who’d been hurt by Chinese trade violations. That includes tens of thousands of members of the union I lead, the United Steelworkers (USW). China improperly subsidizes its industries, enabling them to charge prices that often are below production cost. Beijing requires U.S. companies to transfer intellectual property in exchange for operating in China. It has engaged in cyber theft of U.S. trade secrets, including from American steel companies. It commits other violations, including currency manipulation and trans-shipping to circumvent tariffs. As a general case, it flouts international trade rules and regulations so that it can dominate markets.
American manufacturers and their workers wanted Donald Trump to stop all of that. And, for a while, it looked like he might.
After a yearlong investigation to determine whether imports of steel and aluminum had so diminished the U.S. capacity that national security was threatened, the Trump administration on March 1 placed 25 percent tariffs on imported steel and 10 percent on imported aluminum. The intent was to preserve enough of the U.S. industry that filling defense needs domestically would not be at risk.
These sanctions followed a decade of the United States and Western Europe trusting China to keep repeated promises to stop overproducing, only to watch the Asian giant ramp up production even more. In 2001, China produced only slightly more steel than the United States, about 150 million metric tonnes. By 2017, China produced 831.73 metric tonnes, half the steel forged in the world that year. It dumps an average of 90 million metric tonnes on the international market annually, suppressing prices and threatening the viability of mills worldwide.
In announcing the tariffs, President Trump said, “People have no idea how badly our country has been treated by other countries. They’ve destroyed the steel industry; they’ve destroyed the aluminum industry, and other industries, frankly. We’re bringing it all back.”
U.S. industries did begin to gear up, restarting cold furnaces and recalling some 4,000 laid-off workers.
A month after the tariff announcement, the Commerce Department forbid U.S. companies to sell components to ZTE for seven years. This crippled the Chinese telecom equipment maker, which depended on the U.S. for as much as 30 percent of its parts. Commerce punished ZTE for violating a previous agreement concerning sales to Iran and North Korea.
Also in April, the Trump administration imposed 25 percent tariffs on $50 billion worth of Chinese technology imports. This followed an investigation by U.S. Trade Representative Robert Lighthizer’s office that determined improper practices by the Chinese government, including cyber theft and forced technology transfer, were costing the U.S. economy $50 billion a year.
China retaliated within days. Complaining about the aluminum, steel and technology sanctions, it slapped tariffs on U.S. exports including agricultural products such as soybeans, meat and fruit and on high-tech products such as Boeing aircraft.
Hitting back, President Trump ordered the U.S. trade representative to consider tariffs on an additional $100 billion in Chinese imports.
That’s where the dispute stood when U.S. officials went to Beijing in May to begin negotiations. There, a feud within the Trump administration over trade policy erupted in public as Treasury Secretary Mnuchin and White House trade adviser Peter Navarro engaged in an expletive-punctuated confrontation.
Mnuchin and National Economic Council Director Larry Kudlow are freewheeling free traders. Navarro and Lighthizer are demanding fair trade—that is international trade respecting trade regulations.
Mnuchin is responsible for the weak-kneed joint statement on trade last week. Because Navarro’s name is not on the statement, it appears Mnuchin succeeded in excluding him from the meetings.
The joint statement does not require China to reduce its $375 billion trade deficit with the United States by $200 billion, a figure U.S. negotiators demanded at the outset. In fact, experts say China importing additional agricultural and energy products from the U.S. would not even get close to $200 billion and that China was likely to increase these imports because it needs them, not because of any concession to the United States. The statement does not require China to reduce its overproduction and overcapacity in aluminum and steel. And it contains no specifics on China’s forced technology transfer and cyber theft.
Mnuchin gave up the tariffs in exchange for smoke and mirrors. Maybe he was great on Wall Street. He certainly wasn’t on Pennsylvania Avenue.
It’s not clear, though, where President Trump stands. Just before the negotiations last week, the president tweeted that he’d instructed the Commerce Department to ensure that the penalties imposed on ZTE, which employed 75,000, didn’t kill the company.
“President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost,” he wrote.
The first concern of a U.S. president should be the millions of jobs Americans lost because of China’s predatory trade practices. On the campaign trail, candidate Trump told workers he cared and that he alone could fix it.
Mnuchin did not fix it. He made matters worse by relinquishing America’s leverage in exchange for nothing.
U.S. Commerce Secretary Wilbur Ross, who is aligned with the tough-on-trade faction in the administration, is scheduled to go to Beijing next week. To fix this mess, he’ll need Trump’s unwavering support and a spine of steel.