Everyone understands that when you go into a negotiation you have to make trade-offs. No one expects to get everything on their wish list. For this reason, no one should have been surprised that Donald Trump wasn’t able to run the table when he met with China’s President Xi Jinping last month, but they might be surprised at what he apparently gave up.
A central theme of Donald Trump’s presidential campaign was that our trade negotiators were stupid and that they had negotiated rotten trade deals. He claimed this was the cause of the country’s $500 billion plus trade deficit (a bit less than 3.0 percent of GDP).
In particular he singled out our trade deals with China, the country with whom we have the largest trade deficit. He called China a “world class currency manipulator.” He vowed that he would declare China a currency manipulator the day he took office and follow up with punitive measures. He was going to force China to raise the value of its currency against the dollar.
During the campaign Trump apparently felt China’s currency management was an important issue. He raised the point repeatedly at his rallies. He also raised it during the presidential debates.
It is also worth noting that China does in fact manage its currency. (“Manage” is a more accurate word than “manipulate.” China’s interventions in currency markets are mostly public knowledge. We don’t have to catch them doing something in the middle of the night.) China’s central bank acquired trillions of dollars of U.S. assets and other reserve currencies in the last decade. More recently, the country has put more than $1 trillion into a sovereign wealth fund that holds assets in other countries. These measures have the effect of propping up the dollar against the Chinese yuan.
While China is no longer buying up reserves, it still holds more than $4 trillion, counting the sovereign wealth fund. These huge holdings act to keep down the value of the yuan against the dollar.
Trump could have negotiated with President Xi to go on a path of gradually raising the Chinese yuan against the dollar. According to many accounts, this is consistent with China’s plans anyhow. The goal in reducing the trade deficit would simply be raising the value of the yuan somewhat more quickly and perhaps by a somewhat larger amount than China would raise it on their own.
But Trump chose to drop the currency issue. According to his own account, he developed a great rapport with President Xi. Rather than upset Mr. Xi by talking about currency, he is counting on China’s assistance in controlling the nuclear threat posed by North Korea.
This story is really kind of shocking. After all, it is hardly a secret that North Korea is now a nuclear power that cannot be counted on to act responsibly with its weapons (i.e. not use them). It also is well-known that China is by far North Korea’s most important ally.
In short, there is no excuse for a person running for president not to realize that he would need China’s assistance in dealing with North Korea. But apparently, this was news to Donald Trump. And, if the issue is whether to engage in a nuclear war with North Korea or drop demands against China on its currency, it’s understandable that Trump or anyone else would decide avoiding nuclear war is more important.
But the amazing part is how Trump could just now be learning of China’s importance for controlling North Korea and why he didn’t have a strategy for negotiating on currency that took this into account. As with health care, taxes, and so many other areas, President Trump is just now finding out what almost everyone else already knew – things can be complicated.
The failure to address currency issues means that Trump is putting on hold his promises to manufacturing workers in Pennsylvania, Ohio, Michigan and elsewhere that he would get back their jobs by bringing down the trade deficit. For now at least, Trump has little on the table that offers much hope of a lower trade deficit.
Although the laid off workers may still be left out in the cold, Trump’s negotiations with President XI did seem to offer some real dividends. His daughter, Ivanka Trump, was awarded several trademarks for her clothing brand in China. She had been trying to secure these trademarks for a considerable period of time, so she was undoubtedly quite pleased that the approval happened to come through when her father was meeting with President Xi.
So America’s workers may not be doing so great in Donald Trump’s America, but at least things seem to be going well for Donald Trump and his family.