China’s free trade agenda

What leverage does China have for negotiations?

U.S. Treasury Secretary nominee Steven Mnuchin said during his Senate confirmation hearing he’s willing to label China as a currency manipulator if warranted. His views on the country are significant because the Treasury Department is tasked with determining whether governments are providing their companies with unfair trade advantages. Trump has threatened imposition of 45 percent tariff on good from China.

Comment

President Bill Clinton’s administration in 1994 tied Chinese cooperation on exchange-rate policy to negotiations for World Trade Organization entry. China took measures that eased U.S. concerns, shaking the manipulator tag, even though it took years to enter the world’s main trade body, which happened in 2001.

The yuan fell 6.5 percent in 2016 against the U.S. dollar as capital flowed out, Chinese firms went on a global shopping spree and its savers looked to diversify their wealth in everything from apartments in Sydney to Hong Kong life insurance products. The People’s Bank of China spent billions of dollars trying to cushion the yuan’s slide.

Analysis

America no longer holds such leverage, and its Chinese President Xi Jinping who’s advocating for free trade and globalization in contrast to Trump’s protectionism.

In 1994, China made up about 2 percent of the world gross domestic product versus 26 percent for the U.S. In 2015, China accounted for 15 percent of world gross domestic product and the U.S. 24 percent. China’s rapid development and diversification of its economy since then have reduced the relative importance of its bilateral trade ties with the U.S.

Assessment

If U.S. President-elect Donald Trump gets tough with China on trade, lining up against him likely will be another powerful adversary: American multinational corporations, China’s leverage. This could be why Xi Jininping defended globalization and free trade at the world economic forum, Davos appealing to the multinational corporations.