Price: Pomp, planes, and posturing—why China believes it can play a longer game on trade

Unsurprisingly, the Trump-Xi Beijing summit ended without a major announcement on trade. Behind the celebratory mood and photo-ops are years of economic harm from China’s predatory trade practices that cannot be overcome in a single meeting.

Massive state subsidies, rampant excess capacity, and an “export-first” approach upended the global trading order and have still not let up. This summit may be a step towards stabilizing the relationship. But China’s ambitions to dominate global trade are unchanged. And that has spillover and backdoor effects on the health of US manufacturing.

Trump-Xi summit recap

There were several modest commitments from the summit. China reportedly agreed to buy 200 Boeing jets. (It typically takes many years before they are delivered due to existing backlogs.) According to the Office of the US Trade Representative (USTR), China also committed to buying at least $10 billion in US agricultural products. Beijing in addition pledged to allow greater access for US meat products. (Previous commitments have not been fulfilled).

Perhaps most intriguingly, the US and China also agreed to establish a “Board of Trade”. It would negotiate tariff relief on key US exports. This approach is designed to rebalance direct trade with China and to find some degree of reciprocity. Whether this is a meaningful change or merely creates a structure for an ongoing informal process that currently exists is an open question.

We can all agree that a stable US-China trade relationship is a good thing. However, this should not come at the expense of holding China accountable for decades of disruptions or preventing further economic harms. Swapping tariff reductions may be fine for select products. But we should be wary of creating a false sense of security that undoes recent progress in revitalizing US industries.

The US should not let down its guard

The United States must continue to have the fortitude to push back on relentless, state-driven gamesmanship. When China was admitted to the World Trade Organization (WTO), the refrain was that China would adopt market practices. It would become part of a global trading system. However, China leveraged non-market advantages, such as strategic funding, to hack market-based incentives with impossibly cheap prices. As the Organization for Economic Cooperation and Development (OECD) OECD Steel Committee recognized at its March meeting, China is still playing this game in the steel industry. And it intends to wait out the rest of the world’s appetite for low-priced goods.

The US has been at the vanguard of pushing back on China’s export-dependent industrial policy. We all remember the mid-2010s, when China exported historic volumes of steel products. Steel poured into all global markets and caused prices to collapse.

The first Trump administration had the foresight to impose Section 232 duties on steel products from all countries, recognizing the global effects of China’s exports. The same was true for aluminum. Section 232 duties on chapter 72, 73, and 76 began building a bulwark against distorted global pricing that threatened to demolish the US steel and aluminum industries. With greater assurance that distorted prices would not have free rein in the US market, American steelmakers were able to invest more than $25 billion in long overdue repairs and facility upgrades to expand into new product lines.

Steel can serve as the model for other US industries that have been perpetually stunted by China’s unfair trade practices.

Other major economies failed to respond as quickly. And their industrial bases suffered as a result. Now, countries initially critical of expansive trade defense are beginning to impose Section 232-esque duties of their own. That or they are expanding their antidumping and countervailing duty measures. In many cases, it is too late. Their industrial bases have atrophied for so long that many would require a wholesale restart.

As long as China continues to encourage overcapacity and overproduction, the United States must stay the course. We must prevent those distorting price effects from reaching and harming US industries. This will require a multipronged approach, and we are encouraged to see USTR’s leadership in addressing excess capacity through the Section 301 process.

Up next, USMCA negotiations

Now that the first Trump-Xi meeting has passed (and the next may not happen until September), US trade policy will pivot to the US-Mexico-Canada Agreement (USMCA). Negotiations are essentially turning into two separate, bilateral negotiations. This is due, in large part, to the differing responses Mexico and Canada have taken under the second Trump administration. Mexico chose a restrained tone, while Canada chose retaliation. For the time being, the administration is prioritizing negotiations with Mexico, while Canada waits to be invited to the table.

The negotiation window has elicited statements from various Canadian industry groups on USMCA’s role in creating a prosperous and stable North American trading system. However, Canada has taken its fair share of destabilizing and distortive actions for the North American steel sector.

Chief among these is, in our view, the Canadian government’s repeated rescues of Algoma Steel, most recently by helping finance its conversion from blast furnace to EAF production on environmental grounds. As we see it, this project kept unneeded capacity online. It has also added new rolling capacity that was targeting the US market. We think it is reminiscent of the Canadian government’s pushback on U.S. Steel’s effort to right size its North American production by shutting Stelco. Instead, workers at the Pittsburgh-based steelmaker’s United States production facilities eventually paid the price.

The takeaway

With USMCA negotiations underway and more Trump-Xi meetings to come, there is plenty to keep the administration busy. China will, of course, hope these short-term distractions will allow it to continue pursuing its long-term, strategic trade initiatives. The longer the United States can hew to recent, successful trade policies, the more time US industries will have to develop and take on a stronger footing.