As was the campaign and the initial appointments, the election of an
unorthodox candidate promises to change the way things are done in Washington. However, just as there were some continuities between
Obama and Bush, there will be some continuities between Trump and
Obama.
Some policies that are often associated
with Reagan began under Carter. For example, the defense build-up
that many attribute to Reagan began by Carter after the Soviet Union invaded
Afghanistan. Similarly, the deregulation attributed to Reagan also began
when Carter deregulated the airlines.
We are reminded that G.W Bush and
Obama threatened to cite China as a currency manipulator during their initial
campaigns, neither did. Under instructions from Congress, the US
Treasury has developed a more quantifiable definition of currency manipulator,
and still concluded that China does not meet the definition.
Citing China as a manipulator seems difficult in the current
environment. It is true that there are plenty of indications that the
PBOC is engaged in the foreign exchange market regularly. However, rather
than trying to weaken its currency, it has been buying it. If
Chinese officials were to stand back fully, we suspect the yuan would weaken
sharply. Its current account surplus is more than offset with capital
outflows, even if some significant part of the outflows reflect Chinese companies
paying down foreign debt (mostly dollars). China’s trade surplus with the
US has eased this year, and some of those goods that China exports to the US are owned by US companies, who may use local
labor for assembly and other work.
Leaving aside the currency issue, one area that there is likely to be
some continuity between Trump and Obama is the hardline
on trade relations with China. It does not appear to be recognized that the Obama Administration
succeeded in keeping Europe and Japan on board with refusing to recognize China
as a market economy. This is
important.
Earlier it had looked as if the EU, and possibly Japan would break ranks
and accept that China is a market economy. This sounds like a small detail, but what is at stake is combating dumping.
China argues that 15 years after joining the WTO (11 December 2001, when many had argued after 9/11 globalization was over)
the rules that allow anti-dumping duties to be calculated using a special
formula and prices in third countries expires. If China were a market
economy, WTO members would compare domestic prices export prices.
At the end of last week, the US imposed anti-dumping duties on
Chinese-made washing machines (2015 imports ~$1.1 bln). It also
announced it would launch a new anti-dumping investigation into Chinese plywood
imports (2015 imports ~$1 bln). China has sought consultations with
the EU and US and indicated that if it did not get satisfaction, and has filed
a formal WTO complaint.
The EU’s own rules regarding dumping
are being revised with an eye toward
China. An agreement was struck earlier this week that will allow the
EU to impose higher tariffs on imports of some raw materials. At issue is the
EU’s “lesser-duty rule.” This allows the imposition of a tariff on
imports that offsets the injury suffered by domestic producers, but not as
large as “dumping margin,”
which is the difference between the price of imports and what is calculated to
be a fair price. In practice, this means that EU applies considerably lower
duties than the US. For example, the EU imposed a 21% tariff on the same
(cold-rolled) steel products this year that were hit by a 266% duty by the US
last year.
The UK had been perceived to be among the most vocal proponents of
recognizing China as a market economy, but its influence in the EU has waned
since it voted to leave. Slow domestic growth makes Italian steel
producers particularly vocal in resisting giving up the WTO’s anti-dumping
protections. Reportedly, Spain is also reluctant. Germany, which is
more competitive, making it less vulnerable to cheap Chinese steel imports, but
it appears to have decided to use its political chits on something else.
Last week, the EC launched three new investigations into dumping charges levied
against China in steel and iron. The EC has already imposed
18 anti-dumping and anti-subsidy measures
against China.
Before the new US Administration assumes office, trade tensions with
China have increased. It is not simply an American-Sino issue. The EC
is also becoming less tolerant. Among emerging market economies Brazil
and India have reportedly become more aggressive in bringing anti-dumping
charges against China. The confrontation is unlike to abate regardless
of the outcome of next year’s elections in Europe or the operational policy of
the Trump Administration. Even more, the integration of China more
fully into the world economy is one of the most critical political and economic
challenges. Some suggest that the disruption created by China’s
membership in the WTO may be a contributing factor to the economic malaise that
has been one (of many) contributing factors behind
the rise of populist-nationalist forces.