China joined the WTO at the end of 2001 during the George W. Bush presidency. By 2016, following fifteen years of spectacular growth, China's trade policymakers were somewhat taken aback by the pointed criticisms of America's new President on unfair trade practices, manipulation of the yuan and the unsustainable trajectory of China's long-term structural surpluses with the U.S. The U.S.’s focus at the time was to put the merchandise trade deficit with China back on a less steep path. Without a mutually acceptable adjustment, the U.S. explained that the large, structural trade deficits with China were not in its long-term interests.
The Administration’s first proposal was to reduce the overall deficit by close to half, through a combination of market opening measures, growing the U.S.’s services surplus and some minimum purchases in obvious areas like energy, agriculture and transportation. When the two sides couldn’t reach agreement at this level, the U.S. instituted the first of a series of tariffs which remain in place today. The U.S. also exited the TPP (https://www.tamarackinvest.com/post/2017/01/04/as-trump-rides-herd-on-asia-trade-deficits-is-any-of-the-tpp-worth-saving).
As we added in April 2018, (https://www.tamarackinvest.com/post/2018/04/06/testing-the-limits-of-faustian-trade-agreements), China was not recognizing the validity nor accepting the “Faustian“ arrangement the U.S. was seeking and had developed successfully with Japan decades earlier. Under this arrangement, Japan was allowed to continue running large surpluses and grow faster than it otherwise would have, as long as it recycled surplus dollars back into treasuries/agencies to keep U.S. interest rates low. Also, importantly, the yen was made to appreciate significantly against the dollar, from the 240 to 140 range under the Plaza Accord.
This past April, U.S. Treasury Secretary Janet Yellen delivered a speech at Johns’ Hopkins’ SAIS (https://www.youtube.com/live/BuAjL26N-vo?feature=share), that outlined in detail the areas where past and current U.S. administrations believe China has fallen short on its commitments within the WTO. Yellen, though serving as Treasury Secretary, also emphasized in her speech the over-riding importance of national security to the U.S.
Her request for substantive discussions on the issues she raised was accepted by China less than three months after this speech and she was warmly welcomed in China in July. The sequence of follow-on events, with Secretary Blinken on the back of Yellen's and then an immediate subsequent visit by Henry Kissinger, says volumes: China is listening to Yellen and addressing her team’s points.
Yellen has been thrust into the role as statesperson at a critical time in US-China relations. She seems to be the right person at this time to foster a reset, beginning with increased dialogue. Yellen has taken on Ben Franklinesque qualities - an intellectual powerhouse, her credibility as a former Fed Chair and current U.S. Treasury Secretary, coupled with her numerous other accomplishments afford her a wide audience and place her largely above reproach as a negotiator.
Coordinating well with a hard-working Secretary of State Blinken and at the Commerce Dept. with U.S. Trade Rep Katherine Tai, Secretary Yellen seems to be laying the foundation for a new framework between the U.S. and China, beyond trade and financial markets to include areas of national security and most importantly, technology.
Chinese policymakers have taken some solace historically in avoiding what they view as the economic missteps of Japan's “lost decade” in the 1990s. The Plaza Accord was seen as a capitulation by Japan, rather than a new post-mercantilist framework of sustainable growth that was acceptable to the United States. In retrospect, the 90s were not lost for Japan, as companies learned to work better in global consortiums, became more efficient, specialized and profitable. Japanese companies matured during this time and became more valued global partners.
Do the U.S. and China have some wide-ranging agreements in the works? Not just to cover trade issues, but also to include improved military ties and joint collaborations, such as in space, as well as in social areas like TikTok and entertainment? As global supply chains continue to “de-risk” by becoming more diversified, the prospect of the world’s two largest economies coming together on broader issues is certainly enticing. Sometimes having the right principals at the helm can make all the difference. Janet Yellen is that person.
