Trump’s tough talk on China faces harsh trade realities

The Republicans are making China America’s primary global foe at their convention this week, and President Donald Trump even suggested the world’s two largest economies could go their separate ways if he’s reelected.

That’s the political blunderbuss, some of which was also heard at the Democratic show last week. The reality is something else: The cost of a divorce is — even to the president’s own allies — prohibitively expensive. And that likely means, no matters who wins the presidency, that the two powers are condemned to a messy marriage, full of acrimony yet also, possibly after Election Day passes, some form of reconciliation.

There was of course no sign of a détente on the RNC’s virtual stage.

Former United Nations Ambassador Nikki Haley on Monday said “Communist China gave us the coronavirus.” Secretary of State Mike Pompeo pledged that jobs are “coming home” from China on Tuesday. Trump himself previewed the strategy on Sunday, pledging to bring 1 million jobs back from China and to deny federal contracts to companies that shift jobs there. “We don’t have to” do business with China, Trump said in a Fox interview, adding that he’s willing to decouple the economies “if they don’t treat us right.”

But separating the world’s two largest economies is next to impossible, and any hasty attempts to cut ties — like the recent ban on sales to telecom giant Huawei — could bring massive costs for the domestic economy.

China is America’s third-largest trading partner, after Canada and Mexico, and though bilateral trade slowed in 2019, the Census Bureau says it still neared $560 billion.

“Is it realistic to completely decouple across all sectors? I don’t think it is, and I don’t think it’s desirable,” said Clete Willems, a partner at Akin Gump and a former trade adviser to President Trump. “It would be a mistake to think you can bring every single one of those jobs or supply chains back to the U.S., so I think the administration should think about how to work with allies and trusted partners on supply chain issues.”

There are clear divisions in the White House over how hard to push on China. Trade lawyers in Washington expect economic advisers like Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow to back trade normalization with China in any second Trump term. On the other side are trade adviser Peter Navarro and the president’s national security team, where figures like Secretary of State Mike Pompeo want the U.S. to keep Chinese companies — and the ruling Communist Party — out of critical industries like telecom, energy and healthcare.

Rather than a complete decoupling from China, the more likely strategy is “diversification,” as the U.S. tries to limit Beijing’s involvement in critical sectors and American firms move business to other, lower-wage countries.

“Many U.S. companies are starting to diversify from China but they are not coming back to the U.S. right now,” said Ho-Fung Hung, a political economy professor at the Johns Hopkins School of Advanced International Studies. “The global supply chain for making products is already dispersed in Asia or other places, so when you move one part out of China it is unlikely to move all the way back to the U.S.”

And rapid policy moves to decouple industries from Beijing — such as the U.S.’s recent ban on sales to telecom giant Huawei and its affiliates — could mean big losses for American companies that rely on access to China’s 1.4 billion-person economy.

Some further weakening of ties to the Chinese economy may be inevitable no matter who wins the presidency. Former Vice President Joe Biden pledged in his Democratic National Convention speech last week that if he’s in the Oval Office, America “will never again be at the mercy of China and other foreign countries” for medical supplies and other critical goods because “we’ll make them here in America.”

Trade watchers see a critical difference between the candidates’ China approaches. Trump has preferred to combat China alone, sometimes angering allies with unilateral tariffs. Meanwhile, most observers, even some Republicans, expect Biden to engage allies as he looks to curtail reliance on the Chinese for critical products.

Some American business interests in China say getting allies on board with U.S. sanctions is critical to preserve their competitiveness. If the U.S. moves to restrict business relationships with Beijing, but allies do not, firms from those countries could just fill in for American suppliers with little impact on the Chinese.

“It’s a big concern for us and our members,” said Jacob Parker, a senior vice president at the U.S. China Business Council. “If companies are either forced or restricted from buying from the Chinese market but there isn’t a coalition of allies doing similar things, then American companies will lose market share to European companies.”

The tech sector says a version of that story is already playing out in semiconductor manufacturing after the White House blocked the sale of microchips to Chinese telecom giant Huawei and its suppliers.

The White House and leaders from both parties are concerned the Chinese could use Huawei technology to spy on the U.S. if the firm is allowed a key role in the buildout of the next generation of wireless networks, or 5G. But U.S. semiconductor companies say the administration’s new sales ban is too broad, covering not just Huawei, but any companies that do business with it, stifling billions in microchip sales to companies worldwide.

The White House is now pressuring world governments to replicate its Huawei policies, but other than a ban in the U.K., Europe and others have yet to follow suit.

Willems said the administration is still working to “get the balance right” when it comes to blocking Chinese firms on security grounds. But he stressed either candidate will face the daunting task of deciding which Chinese investments are national security threats and which are beneficial commerce.

“There is a legitimate national security threat as it relates to Huawei … but I don’t think you should apply that logic to less sensitive materials,” Willems said. “When we use national security justifications to restrict market access into our own country, we need to be very precise about what the threat is we’re responding to and design a measure that responds to that threat.”

Along with Trump’s efforts to curb Huawei, the White House is pushing American utilities to strip Chinese-made devices from their power grids, concerned Beijing could use them to trigger outages. Both Trump and Biden have also said they want to extract medical supply chains from China after critical medical supplies from there were severely disrupted in the early days of the pandemic.

Willems said a second Trump term could also bring measures to block U.S. financial institutions from investing in Chinese companies that enable human rights abuses or aid its military. Like in the tech sector, either candidate will face the unenviable task of deciding which Chinese firms are off limits to investment in the next few years.

“That is another area where we need to be more nuanced in our approach and think through which companies and which investments in China are problematic, because it truly does help their military, for example,” he said. “But I don’t think we ever want to be in a position where we don’t have any investment into China.”

Trump’s rhetoric toward China could be more of an election ploy than a policy platform. But while Beijing was quick to dismiss such aggressive language early in the Trump presidency, Hung said Chinese leaders take it more seriously today. “They’ve come to realize it is not only tough talk,” he said. “They do take action on a lot of things that hurt Chinese interests.”