Could Only Donald Trump Cut a Free Trade Deal with China?

The phrase “Only Nixon could go to China” sprung from the idea that only Richard Nixon, who had established some anti-communist cred, could have gotten away with a trip to communist China in February 1972.

Today, President Donald Trump is staking out ground as the first overtly protectionist U.S. president since the dark days of Herbert Hoover. Could this guy, in Nixonian fashion, turn the tables and cut a productive trade deal with China?

Unfortunately, right now, China competes with Mexico as Trump’s favorite target for protectionist tariffs and tweets. Thus far, he has imposed tariffs on dishwashers and solar panels, threatened tariffs on steel and aluminum, and identified a list of some 1,300 goods from China that could be hit with a 25 percent tariff. Predictably, China has retaliated by announcing proposed 25 percent tariffs on U.S. goods.

Trump’s big concern is the trade deficit. He apparently thinks the U.S. is losing if it runs a trade deficit, missing the fact that a trade deficit is not an economic negative. In reality, the U.S. trade deficit increases during good economic times, when U.S. demand for consumer, intermediate and capital imports increases, and when the capital account is in surplus thanks to foreigners investing in the U.S.

In addition, the Trump administration has highlighted the failure of China to protect intellectual property, including the demand for technology transfer from U.S. firms working in China. Of course, China is still a communist country, and has been for nearly 70 years, so we perhaps shouldn’t be all that surprised that they fail to adequately protect private property rights.

The response of raising taxes on American consumers, entrepreneurs and businesses, coupled with reduced opportunities for U.S. exporting enterprises and workers thanks to retaliatory measures by China, is the wrong way to deal with the challenges of doing business in China.

In a Wall Street Journal piece, economist Martin Feldstein argues that the dispute over intellectual property in China should be left to the WTO. Feldstein wrote: “Presidents Trump and Xi could meet and agree that both countries would now accept a literal interpretation of the WTO rule barring technology transfer as a condition for market access...” That certainly would be a significant improvement over the current uncertainties and threats of a destructive trade war.

But more is needed. The U.S. should start talks with China with the end goal being a U.S.-China free trade agreement.

In contrast to an adversarial fight focused higher tariffs, free trade talks could serve as a positive vehicle for educating the Chinese that open markets and protecting property rights are necessary for the Chinese economy to develop beyond being a low-cost manufacturer for the world. True innovation requires sound incentives for private investment and entrepreneurship. That requires, among other things, the rule of law, strong property rights, low taxes, light regulation, and free trade.

There’s certainly no guarantee that such talks would succeed. However, a multi-year effort has a chance to lead to a series of agreements along the way, perhaps each focusing on certain policy areas, such as tariffs, quotas, or intellectual property, and/or certain sectors of the economy. The goal, perhaps even several years down the road, would be to tie it all together in a comprehensive U.S.-China free trade agreement. Investors, entrepreneurs, businesses and markets certainly would benefit from these two significant economies moving in a productive direction.

After having said all of this, it must be noted that “Only Nixon could go to China” was and remains a political overstatement. After all, by 1972, Nixon was far different from his heyday as an anti-communist, including having signaled for a few years that he was willing to open the door with China. That’s very different from Trump. Arguably, the only issue where Mr. Trump has not changed positions is on trade, as his protectionism reaches back into the 1980s. But if an economic advisor, such as Larry Kudlow, could actually teach Trump about the realities of trade, and point him in the direction of opening talks with China on a free trade agreement, it would make Nixon’s going to China seem downright mundane.

Is the following political phrase possible at some time in the future? “Only Trump could cut a free trade deal with China.” Well, it’s a longshot, to say the least, but these days, who knows? After all, this president sure does like to refer to himself as the consummate dealmaker.