As President Trump takes on China in a trade war, it’s not necessary to convince Americans that China is an economic enemy. A recent Pew Research survey found that 60% of Americans have an unfavorable view of China. That’s up from 47% last year, and the highest level in the history of the 14-year-old survey. What may require more convincing, though, is that tariffs are the right way to accomplish the president’s goal: “Trade that is free, fair, reciprocal and balanced.”
“You can’t be belligerent with the Chinese,” says Phillip Braun, Professor of Finance at the Kellogg School of Management at Northwestern University. “You have to create a win-win situation.”
Braun feels that Trump’s heavy-handed approach, led by economic advisor Peter Navarro, is not working. (Fortune took a look at Navarro’s background and approach here.) Braun says there needs to be mutual respect. “If you start off demanding things, rather than compromising and moving towards a single point, the Chinese can’t negotiate from that standpoint because they’ll lose face. The current Chinese government is not going to do anything that will make them look weak.”
He says the process should start with two general guidelines:
• Don’t talk about it in the press
• Work behind closed doors to try to find solutions
Anthony Chan agrees. “The sense of national pride in China should never be underestimated.” Chan has visited China 30 times over a period of 25 years as Chief Economist with JP Morgan, including meeting with government officials. “They don’t want to look weak as they prepare to celebrate their 70th Birthday, so let’s stop publicly bashing them or telling the world that China badly wants or needs a deal and is begging us to negotiate. That makes China less likely to strike a deal with the U.S.”
He says by negotiating behind the scenes, you could find out what issues are important to China and then quietly begin to offer those up in exchange for what’s important to the United States, such as preventing IP theft and forced technology transfer.
But Navarro’s colleague, Greg Autrey, Professor of Entrepreneurship and Innovation at the Marshall School of Business at the University of Southern California, who co-authored the book, “Death by China” and co-produced the documentary by the same name, thinks the U.S. has been down that “nice” road before. “This task requires a lead disruptor, like the microcomputer industry required Steve Jobs and the auto and space industries needed Elon Musk. He sees Navarro, working with Trump, as that disruptor.
“For a historical analogy,” Autrey says. “Jimmy Carter was ‘nice’ with the Soviets. Ronald Reagan called them the ‘Evil Empire’ and the advocates of ‘nice’ were appalled. Neville Chamberlain was ‘nice’ and people were aghast at Winston Churchill’s gruff demeanor. General Montgomery was ‘nice’ and Patton was not. I’ll take Reagan, Churchill and Patton when I have an existential threat to deal with.”
Autrey also says the financial media is being naïve when, after the Chinese cheat on all the agreements they’ve ever signed, the media wants someone from the Trump administration to just go in and get China to sign more agreements. “Why? So they can go back to selling off U.S. assets and transferring technology and capital while China builds nukes aimed at you and me? It’s just stupid.”
Autrey says the U.S. can’t be soft on China. “Trump was smart enough to make it clear he has power, which is the only thing Beijing respects. He can then proceed from a position of authority.”
Of course the on-again, off-again, tariff approach from Trump has not paid off on Wall Street, with the Dow Industrials in a range for the past two years. (Of course, stock prices are never based on one thing.) In addition, JP Morgan predicts that American families will pay about $1,000 in additional costs as consumers, on average, as the result of trade tariffs; and several economists have revised their economic projections downward, including the Congressional Budget Office. And there’s also the inverted yield curve, often a harbinger of a recession. (Again, not necessarily tied directly to the tariffs.)
Professor Braun doesn’t see playing hard ball with tariffs on China will bring factory jobs back to America. “I don’t expect it to happen,” says Braun. “Our U.S. wage rate is too high relative to some Southeast Asia countries.” And he points out that the factories moving out of China are not opening up here in the U.S. “They’re going to places like Vietnam, Cambodia and Thailand.”
Both Braun and Chan agree that the benefit for China of reaching an agreement is having access to Western markets. “I think they still want to trade with the U.S., so they’ll be willing to give up something,” says Braun. “But ideally, it has to be an international effort, so that China would stand to lose access around the world if they didn’t comply.” That would include the European Union, with Germany and the U.K., Canada, Mexico, and Japan, among others.
“Why not capitalize upon that shared discontent,” says Chan, “by seeking to form a coalition with all these countries? That would make China feel isolated and more willing to make concessions that favor eliminating or at best reducing their hated trade practices.”
But Trump has already established that he likes to go it alone in dealing with the Chinese. That may actually lessen his leverage, especially given that he has an election coming up in a year, something the Chinese are fully aware of, and which they could use it to their benefit.
But the consequences of getting it wrong with China are summed up by Autrey, and he doesn’t mince words. “China is the most dangerous peer competitor the U.S. had ever faced. Unlike Germans or the Japanese Empire, they fully intend to displace us on the global stage. Like the Soviets they are determined to see our ideology perish. Unlike the Soviets we have made them wealthy and economically viable via the transfer of tech, capital and ‘low level’ capitalism that they have incorporated into their centrally planned model.”
Sounds like a war with no easy end in sight.
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