Political differences hang over trade talks
Top officials from the Trump administration will travel to Beijing this week purportedly to avert a trade war, but they are unlikely to overcome fundamental differences with the communist government.
Underlying the growing tensions with China are disagreements over how to calculate trade deficits and the role of government in regulating the economy, Dominic Ng, CEO of East West Bank, told me during an onstage interview at the Asia Society in Houston.
“The U.S. today is still using an accounting method that was developed in 1948,” Ng said. “It’s amazing that we have these ancient, grossly inaccurate numbers.”
President Donald Trump is dispatching his top economic advisers, including Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer, White House trade adviser Peter Navarro and National Economic Council head Larry Kudlow. They are expected to meet Thursday and Friday with President Xi Jinping and Vice President Wang Qishan.
Both countries are locked and loaded for a trade war, giving this visit remarkable significance.
Trump has already announced punitive tariffs on $50 billion in annual imports from China.
When Chinese officials rolled out their list of retaliato-
ry tariffs, Trump asked his trade team to come up with another $100 billion of Chinese imports to target. The Reuters news agency reports that Beijing’s threats alone have already halted Chinese imports of U.S. soybeans, 65 percent of which go to China.
International Monetary Fund Director Christine Lagarde has warned that the world trade order “is now in danger of being torn apart.”
Trump’s stated goal is to reduce the $375 billion U.S.-China trade deficit by $100 billion. But Ng said China rejects the old-fashioned way the U.S. calculates the deficit.
Using the iPhone as an example, which represents $17 billion in annual Chinese exports to the U.S., he explained how the current trade numbers don’t account for global supply chains.
“In the iPhone, about 18 percent of the components come from South Korea, and then about 10 percent come from Japan, then some from Germany and the Netherlands. The U.S. did the design and marketing and microchips,” Ng said.
“The cost of assembling these components is about 2 or 3 percent of the cost of this iPhone. But if the cost of the iPhone is about $230, and you use this ancient calculation of China-U.S. trade, they will count it as $230 toward the deficit.”
The East West Bank was founded to serve Chinese-Americans in Southern California, but it has grown into a $40 billion institution with full-service branches and offices across the U.S. and China. Ng, who was born in China and earned his accounting degree from the University of Houston, serves clients in both countries.
Until the U.S. concedes that the trade deficit calculation is flawed, and the actual deficit might be less than half the official number, then negotiating an agreement to prevent a trade war will be difficult, he said.
Political differences complicate the talks. The U.S. government prioritizes protecting the freedoms of people and markets. The communist government focuses on lifting the Chinese people into the middle class by any means necessary.
“As a communist country, if they have to tell the accountants to back off, to tell the media to shut up if they have to round up the short-sellers, they will do all of these things that the U.S. considers illegal or not marketdriven,” Ng said.
The Communist Party has already lifted 400 million people out of poverty and is on track to count 650 million Chinese as middle class in 2025. Chinese officials question why U.S. officials allowed markets to crash, as they did in 2007.
“They ask, is it fair that the market enriched five private equity founders by taking out this huge portion of the middleclass American public?” Ng said. “I think that’s a very debatable question that they are asking.”
This reflects the Chinese social contract in which the people grant the Communist Party absolute power in return for economic growth. The party uses all of its power to deliver, not caring less if it infuriates capitalists who correctly observe that the Chinese have rigged the system.
If Trump’s team demands that Chinese officials give up their complete control over the economy, Xi feels confident he can weather a trade war because of his absolute power.
Administrations going back to President Ronald Reagan have naively believed that the Communist Party would eventually adopt Western values. But Trump’s realism comes too late.
Americans will need to figure out how to outcompete and use China’s system to their advantage to maintain economic power. Expecting concessions from the Communist Party is as naive as thinking China would become a liberal democracy 30 years ago.