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China is said to offer path to end US trade imbalance

Jan 18 2019 21:13

China has offered to go on a six-year buying spree to ramp up imports from the US in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.

By increasing goods imports from the US by a combined value of more than $1trl over that period, China would seek to reduce its trade surplus -- which last year stood at $323bn -- to zero by 2024, one of the people said.

The officials asked not to be named as the discussions aren’t public.

The offer, made during talks in Beijing earlier this month, was met with skepticism by US negotiators who nonetheless asked the Chinese to do even better, demanding that the imbalance be cleared in the next two years, the people said. Economists who’ve studied the trade relationship argue it would be hard to eliminate the gap, which they say is sustained in large part by US demand for Chinese products.

U.S. stocks extended gains and the dollar rose following the news. The S&P 500 Index rallied, climbing 1.3% by 1:27 pm and heading for its fourth weekly advance, while the dollar traded at session highs.

It’s not the first time China has made an offer to reduce the deficit as a way of trying to break the deadlock between the sides which has darkened the global economic outlook and roiled financial markets since last year. In May, Trump scrapped a framework for a deal negotiated by Treasury Secretary Steven Mnuchin that would have seen China “significantly” increase purchases of US goods.

By agreeing to buy more goods from the U.S., China may just shift its trade surplus toward other trading partners, said Tom Orlik, the chief economist for Bloomberg Economics.

“If China switches its imports from other countries to the US -- less Brazilian soybeans, more US soybeans -- that might help deal with their bilateral problem with the US, but at the expense of worsening imbalances with other countries,” he said.

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Additionally, the types of products that China offers to buy more of could matter more than the overall target for a dollar amount, Orlik said. Airplanes, soybeans and automobiles were among China’s top U.S. imports last year.

“Over the years, China has used the offer of purchasing more technologies with national security applications as a gambit in trade negotiations,” said Orlik. “That’s always been unacceptable to the U.S. because of the strategic costs.”

Failed Attempt

Even a massive buying binge would likely fail to eliminate the trade deficit with China, said Brad Setser, who served as deputy assistant secretary for international economic analysis in the Treasury during the Obama administration.

It’s not clear how quickly US farmers and companies would be able to meet increased Chinese demand, he said. Increasing exports of soybeans would require more land dedicated to growing the crop and investment in storage capacity. Likewise, exporting more LNG to China would demand a surge in investment in export terminals.

For Boeing, which has been straining to meet existing orders for its planes, it would likely mean adding a new plant.

READ: Seven key issues to determine success of US-China trade talks

Moreover, none of that would address US demand for Chinese-produced goods and China’s control of the assembly of products such as smartphones and laptops, or some of the main drivers of the US trade deficit. Shifting production or final assembly to a place such as Vietnam would do a lot to reduce the US deficit with China but it would potentially be illusory.

Closing the trade gap “would require enormous changes and it would require and all out effort to get a Chinese industrial policy to disguise China’s exports to the U.S. by routing them elsewhere,” said Setser, who is now at the Council on Foreign Relations.

“You can’t get rid of the bilateral deficit unless you shift the location of final electronics assembly out of China. The math doesn’t work.”

Decisions Pending

No decisions were finalized in the latest Beijing talks and discussions are set to continue at the end of January, when Chinese Vice Premier Liu He is scheduled to travel to Washington.

The US will miss an opportunity for discussions with its trading partners after President Donald Trump canceled his trip and the US delegation’s visit to the World Economic Forum in Davos next week amid the partial government shutdown. While no plans were disclosed for negotiations, Chinese Vice President Wang Qishan is due to attend the Davos summit.

There’s no clear sign that such an offer would now have a greater chance of success or even if it’s practically feasible. US negotiators are also focused on matters including China’s alleged intellectual-property malpractices and state support of industry, disputes that are much harder to bridge.

The Americans’ major sticking points were more prominent issues than China’s import plans during the latest round of talks in Beijing, one of the people said.

The offer implies raising the annual import total from $155bn to around $200bn in 2019 and in increasing steps thereafter, reaching an annual total of about $600bn by 2024, one of the people said.

The Commerce Ministry in Beijing didn’t immediately respond to request for comment on the negotiation details. The office of the US Trade Representative didn’t immediately respond to a request for comment.

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