Rich Miller, Andrew Mayeda , Jenny Leonard
President Donald Trump looks to be preparing for a potentially protracted economic war with China by clearing the decks of disputes with America鈥檚 other trading competitors.
In just the last few weeks, he鈥檚 struck a last-minute deal with Canada and Mexico, signed a trade agreement with South Korea and convinced Japan to begin bilateral economic negotiations. The North American accord also includes provisions seemingly aimed at keeping Chinese products out of the region.
鈥淪everal months ago the U.S. had a multi-pronged attack on its trading partners,鈥� said Dec Mullarkey, managing director for Sun Life Investment Management which oversees $47 billion in assets. 鈥淣ow the U.S. can zero in on China.鈥�
Donald Trump speaks on the U.S.-Mexico-Canada Agreement, or USMCA, on Oct. 1.聽Photographer: Andrew Harrer/Bloomberg
That鈥檚 good news and bad news for the global economy. On the plus side, it suggests that Trump is not an ultra-isolationist who鈥檚 opposed to all types of trade. As economists from JPMorgan Chase & Co. see it, the president is holding back from launching a 鈥渨ar on trade鈥� that could upend the world economy.
But he is embarking on a trade war with China that will take a bite out of both countries鈥� economies next year and raise the risk of a broad pullback in global business confidence, they said in a Sept. 28 research note.
鈥淚t鈥檚 too early to talk鈥� with China, Trump said on Monday in announcing the new pact with Canada and Mexico at the White House. 鈥淐an鈥檛 talk now, because they鈥檙e not ready, because they鈥檝e been ripping us for so many years. It doesn鈥檛 happen that quickly.鈥�
China Focus
U.S. negotiators clearly had China in mind when they hammered out the new trade deal with Mexico and Canada to replace the 1994 North American Free Trade Agreement that Trump labeled a disaster.
鈥淎 small but important part鈥� of the pact is aimed at China, White House trade adviser Peter Navarro said on National Public Radio on Tuesday.
The agreement鈥檚 rules of origin, which govern how much value of a car needs to be made in the region, have been touted by the Trump administration as a tool to keep out Chinese inputs and encourage production and investment in the U.S. and North America.
鈥淭he U.S. seems focused on keeping Chinese imports from gaining real market share in the U.S.,鈥� said Flavio Volpe, president of Canada鈥檚 Automotive Parts Manufacturer鈥檚 Association. 鈥淭he blunt protectionist stick used by this administration may end up creating a coalition of major trading partners that will be difficult for Chinese carrots to compete with.鈥�
The revised agreement also requires the three nations to give three-months鈥� notice if they start trade negotiations with a 鈥渘on-market economy,鈥� an indirect reference to China. The U.S. can terminate its pact with Mexico or Canada if either of them strikes a deal with a non-market economy.
Currency Pact
Canadian Foreign Minister Chrystia Freeland on Monday downplayed the importance of the provision, saying the countries could always terminate the agreement if they wanted to. That is 鈥渁 possibility which exists no matter what,鈥濃�� she told reporters in Ottawa.
The U.S.-Mexico-Canada Agreement, or USMCA, also prohibits its members from seeking to boost their economic competitiveness by devaluing their currencies, something Trump has聽accused聽China of doing in the past.
By settling on a deal with America鈥檚 neighbors 鈥� and beginning talks with allies Japan and the European Union 鈥� Trump is strengthening his negotiating position vis-a-vis strategic competitor Beijing.
鈥淭he next step will be to bear down on China with a broader coalition,鈥� said David Hensley, director of global economics for JPMorgan Chase in New York, noting that other countries share America鈥檚 concerns about Beijing鈥檚 alleged unfair trade practices and mercantilism.
IP Condemnation
The trade ministers of the U.S., the European Union and Japan issued a聽joint statement聽last week squarely aimed at China, pledging to 鈥渁ddress non market-oriented policies and practices of third countries鈥� and condemning the theft of intellectual property from multinational corporations.
鈥淚f the U.S. were to strike new deals with its major trading partners, many of which are also key trading partners of China, Beijing could feel increasingly cornered,鈥� said Eswar Prasad, a former China expert at the International Monetary Fund who now teaches at Cornell University.
Terry Haines, head of political analysis for Evercore ISI, said in a note to clients on Monday that his base case is that the U.S. and China won鈥檛 strike an agreement until 2019 at the earliest.
鈥淏ut the new Nafta deal does show China and others that the Trump administration is willing to conclude new trade deals as long as they address core U.S. concerns,鈥� he said.
Hard Asks
That though may be difficult for Beijing to do. That鈥檚 because the Trump administration is pressing for major changes in the way China manages its economy via subsidies and government-directed聽industrial policy.
鈥淭he things they鈥檙e asking for are pretty much unattainable,鈥� said Phil Levy, senior fellow on global economy at the Chicago Council on Global Affairs and a former trade economist in George W. Bush鈥檚 Council of Economic Advisers.
Trump himself seemed to allude to the difficulties ahead in his comments to reporters on Monday.
鈥淭hey do whatever they want,鈥� he said, referring to Beijing, adding, 鈥淲e have a lot of catching up to do with China.鈥�
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