Can We Minimize the Impact of a Trade War ?
The US has risked setting off a trade war with China by threatening to impose import tariffs on a wide range of goods. China announced its own counter threats before a temporary truce was reached. But then the US responded with a new threat of tariffs and that could upset a fragile peace. Meanwhile，the US has picked fights with the European Union，Japan，Canada and Mexico，demonstrating a decisive shift in America's global trade policy. It shows new concerns in Washington about free trade. The new theme is "fair trade," and at heart this is a rejection of globalization. After Donald Trump assumed the presidency，he quickly ordered a withdrawal from the Trans-Pacific Partnership，a trade accord that was painstakingly hammered out after years of negotiation. President Trump has embraced bilateral negotiations in place of multilateral talks and he has threatened to pull out of the North American Free Trade Agreement despite America's long-term special relationship with Canada and Mexico. These all underscore this policy shift.
Trade disputes between China and the US will only intensify. This is not just economics and trade but has much to do with politics. We need to remain alert to this and develop a long-term strategy to minimize the negative impact of what looks like an unavoidable trade war.
In order to discuss the roots and implications of the US trade policy change，two basic facts should be recognized.
For one，the declining numbers of US manufacturing jobs have only a tenuous link to the trade deficit.
The decline in manufacturing jobs in the US is not new; it started in the 1960s (when international trade was less-developed)，and that trend has continued. In particular，the reduction in manufacturing jobs is not unique to the US，as it is generally common to the developed industrial countries. Even major manufacturers such as Germany，Italy and Japan have been forced to deal with this situation. This fully demonstrates that the decline in manufacturing employment in the US has a limited connection with trade. Otherwise，why is there a decline in manufacturing employment in countries with a trade surplus?
So，why did the manufacturing jobs in major industrial countries decline? The two main reasons are as follows: first，because of the progress of science and technology，labor productivity has been significantly improved. Second，the demand for manufacturing products is relatively inadequate. Robert Lawrence，a famed American trade expert and professor at Harvard University，has made a solid case for this argument.
So even if the United States had a trade surplus like Germany instead of a deficit，its manufacturing jobs would be in decline as well. At present，it is an impossible task to try to improve employment through trade policy in the US，where full employment has been reached.
Secondly，the root of the US trade deficit is obscured.
Economic theory shows that in the long run，a country's balance of trade is related to its saving gap (the difference between savings and investment). Savings greater than investment will produce a trade surplus while lower levels of savings result in a deficit. Since the middle of the 1970s，savings have continued to fall short of investment in the US，and a long-term trade deficit has emerged.
Trade between Japan and the US is a prominent case. Because of Japan's large trade surplus with the US，the US has been negotiating with Japan for many years. Under the 1985 Plaza Accord，Washington managed to force the yen sharply higher but that still failed to solve the trade problem. Paul Volcker，the former Fed chief，wrote in his book Changing Fortunes (as translated by Yu Jie，CITIC Publishing House and published in October 2016): "One of the many ironic things that I had experienced and recorded in this book was that since 1971，the US dollar depreciated repeatedly until dropping 60% against the Japanese yen and 53% against the deutsche mark，but the US trade and current account deficits were much higher than they had been in the 1960s. In contrast，the major industrialized countries which had strong currency appreciation，higher savings，greater productivity and more competitive industries，ended up with sizable surpluses.¡±
I predict that regardless of whether President Trump stays in office for eight years or is turned out after the first term，America's trade deficit will remain because it is very difficult to change the situation of savings falling short of investment. In fact，the shortfall could actually increase as tax cuts and increased infrastructure investment will expand the fiscal deficit. That will result in an even wider gap in savings，leading to a bigger trade deficit. I also expect a further decline in manufacturing employment in the US due to technological advances and reduced demand for manufactured goods.
Based on the above prediction the US trade deficit with China will increase and US manufacturing jobs may fall further. Hence trade disputes between China and the United States will only intensify even without considering other non-economic issues.
Lessons from Trade Wars of the Past
The trade friction between the Washington and Beijing was initiated by the US. Washington’s extreme unilateralism is contrary to existing international rules. If we turn to history for signs of what we might expect，we should note that there have been at least three failed cases of unilateral American-initiated trade disputes.
The first was the "voluntary export restraints" imposed by the Reagan administration in the 1980s on the Japanese auto industry. At that time，the World Trade Organization had not yet been established and could not restrain American unilateral action. Analysis showed that the measure amounted to a 60% tariff on Japan. The measure was eventually abandoned as it proved to be beneficial to Japanese companies and produced only minimal gains for US auto makers. Japanese producers shifted to higher value cars -- which had higher prices and profits -- and they set up plants in the US to avoid the restraints. The end of the VERs benefited American consumers，and ultimately had a positive effect on the American auto industry.
The second instance was in early 2002 when President George W. Bush imposed tariffs of up to 30% on imported steel to support domestic companies competing with low-cost imports. The move was controversial both in the US and abroad. It helped US steel makers，but it squeezed the profits of steel users，especially those in the auto industry. In the end，the WTO ruled that the policy was illegal.
The Bush administration withdrew the measure in December 2003，but the cost was very high. According to an analysis of William Hauk，professor at the University of South Carolina，the US lost 200,000 jobs in the manufacturing industry as a result of this. The entire steel industry had only had 197,000 employees.
During his presidential campaign，Trump accused China of manipulating its currency，keeping its value down to boost exports. But Jeff Frankel，a professor at Harvard University，points out that facts show the opposite is true. China spent large amounts of foreign exchange reserves in 2015 and 2016 to stabilize the renminbi to keep it from weakening. When Trump was elected president，he conceded that accusations of currency manipulation were out of date.
It is said that it is not easy for Trump to change his views，regardless of the available data. But at some point，data may prevail. We hope that the trade wars of the past will have an impact on Trump’s actions.
Three Rounds of Sino-US Negotiations
First Round in Beijing
On May 3-4，2018，the US trade delegation led by Secretary of the Treasury Steven Mnuchin spent two days in Beijing as trade talks got under way.
The trade talks between China and the US attracted considerable attention. For the meeting in Beijing，the US trade team almost swarms out: apart from Mnuchin，others include Secretary of Commerce Wilbur Ross，US Trade Representative Robert Lighthizer，Assistant to the President for Economic Policy Larry Kudlow，and Assistant to the President for Trade and Manufacturing Policy Peter Navarro. Among them，Mnuchin and Kudlow are more sympathetic to free trade while Lighthizer and Navarro are hardline protectionists. For Navarro，the local media ridiculed the 68-year-old trade consultant as someone who could not speak Chinese，hadn’t dealt with China's policy makers，and may not have spent much time in China，but had written several books on the country.
The Chinese delegation was led by Vice Premier Liu He.
The achievements of the talks seem modest indeed，particularly considering the expectations. In view of the lack of sincerity and the unrealistic demands the US presented to China ahead of the trade talks -- which were described by the Economist's Simon Rabinovitch as having "a very aggressive opening position from the US" -- it’s easy to see why.
The list of demands was released by Western media such as the Wall Street Journal and Bloomberg before the talks began，suggesting that it might have been purposefully leaked by the American delegation. The demands include reducing the trade surplus with the US by $200 billion and having China promise to increase its imports of US goods in two years. They also called for the abandonment of some of the policies under the "Made in China 2025" strategic plan，an insistence that China not retaliate against actions the US has taken or will take，a call for restricted investment in sensitive technologies as well as the withdraw of a request for WTO consultations on the US Tariff Measures on Specific Chinese Goods submitted by China and a requirement that China withdraw its WTO claim that it should be treated as a market economy.
Making excessive demands may be seen as a good negotiating tactic，but there are limits. As Martin Wolf，chief commentator of the Financial Times，says that there is no trade agreement that requires both sides to control trade surpluses，which is not in line with general trade rules. Looking at the list of American demands，I cannot help but think of the unequal dealings between the US and Japan of the past.
From the statements issued by the US and China，we can see very clearly that the trade talks achieved almost nothing