Xi and Trump Should Swallow Their Pride and Join the TPP
Joining the trade pact would force both sides to make much-needed changes.
It was the centenary of the end of World War I earlier this month, and the images of entrenched forces locked in a futile conflict were strangely resonant. As U.S. President Donald Trump and Chinese President Xi Jinping prepare to meet at the G-20 in Buenos Aires this weekend, both leaders have already dug themselves into deep trenches. They need to climb out before the U.S.-China trade war becomes a protracted conflict, triggers a global economic crisis, and forces trading partners and international businesses to choose sides.
The only way forward is to seek peaceful coexistence through piecemeal compromise. The perfect vehicle for such talks is the Trans-Pacific Partnership (TPP), the multilateral free trade deal negotiated under former U.S. President Barack Obama, abandoned by Trump, and resurrected by other Asian-Pacific trade partners such as Japan. The G-20 meeting between Trump and Xi should produce an announcement that the United States and China will be launching bilateral negotiations to join the TPP together.
This may seem like a far-fetched idea, but this is not just another U.S.-China downswing. A paradigm shift is happening. Since Deng Xiaoping opened China’s doors 40 years ago, business and trade has provided the ballast to an often tumultuous U.S.-China relationship. The two economies have been basically complementary. China’s low-cost labor and manufacturing prowess provided inexpensive consumer goods that masked stagnant U.S. wage growth and kept a lid on inflation. U.S. companies made a lot of money in China, and China benefited from American know-how, technology, capital, and goodwill in assisting it with building its legal system, educating its best and brightest, and more.
Today, things are very different. China is now an economic powerhouse. Both economies are locked in “strategic competition,” as the United States has labeled it, to be the global leader in the most important technologies of the future.
This has left both countries dug into irreconcilable positions. The United States is essentially demanding that China change its system of authoritarian capitalism. China is insisting that problem is U.S. aggression aimed at containing the country’s rise, not the manner in which China conducts trade and business.
That’s where the TPP could come in. The United States and China share the need for an enforceable, multilateral, rules-based trading framework that would allow for their very different systems to interface without either side having an unfair advantage.
As a first step in sorting out the global trading order, it is imperative that the United States and China get Asia right. The 11 countries that went ahead in March and ratified an adjusted TPP agreement (renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or TPP-11) would not allow the United States and China to join easily. That is a good thing. This would force the negotiators to tackle the most difficult and divisive issues. These include intellectual property protection, state-owned enterprise versus private enterprise competitive neutrality, cross-border investment, industrial policies, and generally working out an interface that does not allow China’s industrial policies and state capitalism to run roughshod over the market-based capitalism that prevails in business and trade across the world.
The United States, whether Trump likes it or not, has to make room for China. The country’s economy is too powerful and its markets too important for America’s leading companies to be blocked by an “economic Iron Curtain” as former U.S. Treasury Secretary Hank Paulson has dubbed the new divisions.
Trump’s tariffs on $250 billion in Chinese goods have captured China’s attention and back-footed its leadership. But he needs a way to wind down the tariffs before they take a serious toll on U.S. manufacturers, farmers, and consumers, many of whom he counts as his core supporters. American soybean exports to China have already plummeted by 97 percent from the previous year.
True, the tariffs are moving some supply chains and manufacturing out of China. But instead of relocating to the United States, they are going to Vietnam, Indonesia, the Philippines, and Mexico. As the founder of one of China’s largest technology manufacturing companies told me during a recent visit to his new $7 billion plant in southern China, “I will just expand in Mexico, because the U.S. doesn’t have the engineers, plant managers, and know-how that we need.”
Xi’s situation is not so different. China is vulnerable. Decades of economic distortions are surfacing, and the country is up to its neck in domestic debt. The only remedy is continued growth. U.S. tariffs will stymie growth and require a new flood of debt-financed stimulus.
Despite positioning himself at home as all-knowing leader and national savior, Xi has to find a face-saving way to back away from the fatal overreach of his signature Made in China 2025 policy and his doubling down on favoring state-owned enterprise over the private sector.
This trade war is really a tech war. Made in China 2025 lays out detailed plans and timetables with specified market share goals for China dominating the important technologies of the future, including artificial intelligence, robotics, biopharma, aerospace, and self-driving vehicles. Backed by endless state money, regulators that can choke out multinational competitors, and national champions able to undercut global pricing, the policy is viewed as an existential threat by governments and technology companies across the globe.
The policy is already on its way to failure. The success of Made in China 2025 depends on investing in and acquiring foreign tech companies and accessing the world’s leading science and technology institutions. But the United States, Europe, Japan and other advanced industrial nations have begun blocking Chinese technology investments and acquisitions.
China’s private sector is capable of building a world-class technology portfolio. The country’s scientists, engineers, and entrepreneurs have attended the best universities and worked for leading technology companies for decades. If Chinese private entrepreneurs backed by the mountains of available private venture capital were purchasing technology companies and investing in overseas startups, nobody would raise a stink. Xi can walk back Made in China 2025 by pivoting to the private sector and ensuring fair competition in the China market. After all, nearly two-thirds of China’s growth and 90 percent of new jobs come from the private sector, according to the All-China Federation of Industry and Commerce.
The beauty of Trump and Xi entering negotiations to join the TPP together is that the TPP agreement is structured to be a living document with a periodic review process and terms that can be adjusted so members can have time reform their systems to comply. Chinese officials have been watching the TPP-11 closely and have sent some signals of interest in joining. Meanwhile, in January, Trump said he would consider rejoining the TPP if a “substantially better deal” was possible. He is capable of saying anything on any given day, but he did declare a minor tweaking of NAFTA as a huge victory, so shifting course on TPP is not out of reach.
My guess is that the 11 TPP signatory countries that went ahead after the United States pulled out in January 2017 would welcome such an initiative from Washington and Beijing. None of them want to be in position of choosing between China and the United States, nor do they want to see the two countries decoupling.
What gets lost in this trade turbulence is that the people of the United States and China are quite compatible. Americans and Chinese are very entrepreneurial, commercially oriented, independent-minded, and have very similar ways of looking at life. Their businesses get along when allowed to do real business without government interference or intervention. The core disconnect is the radically different makeup of the two political systems and seemingly irresolvable ideological and national security issues.
Trump and Xi are also not so different. They both have authoritarian personalities, distrust their own bureaucracies, formulate plans and policies through small groups of advisors, and fancy themselves as historic, game-changing figures worthy of personality cults. That’s part of the reason both sides are in the trenches in the first place.
But at the G-20 in Buenos Aires, the two leaders have a chance to forge a Christmas truce, change their game, and make history by using the TPP to bring business and trade back as a ballast in U.S.-China relations.