CF40:Expectations for President Trump’s first visit to China? WillTrump’s position on trade policy be “softened” when he goes to China? What preparations are needed for China?
Nathan Sheets:The world will be watching closely as President Trump arrives for his first visit in China. The Trump Administration is still workingthrough the stance of its economic policies toward China. There are a variety of views within the Administration as to how strident the United States should be in its relationship with China or, alternatively, the scope for seeking mutually beneficial outcomes. The skeptics in the Administration have argued, incorrectly I believe, that the interactions betweenthe United States and China have on net damaged the U.S. economy. For this reason, the tone of the President’s visit will have great significance. Does he seek common ground and areas of joint interest? Or is there more emphasis on disagreements and complaints? Given all of this, the scope for meaningful concrete deliverables is limited. The bestcase outcome is that, like Mar-a-Lago some months ago, the visit gives rise to a vision for the relationship going forward and identifies issues for the two sides to focus on in their negotiations.
To achieve a favorable outcome,it will likely also be necessary for China to accelerate its progress on some fundamental economic reforms. The Administration will be looking for China to get traction on further opening its markets to U.S. trade and investment. In addition, China will need to strengthen its efforts to address excess capacity in key sectors.
CF40:What are the areas of common interest between China and the United States? Potential areas of cooperation?
Nathan Sheets:The areas of common interest between the United States and China are broad and diverse. As the world’s two largest economies, both countries are deeply invested in the stability of the global economy and financial system, as well as the world’s geopolitical, diplomatic, and security functioning. These over-arching common interests have formed the basis for the bilateral relationship and dialogue between the two countries for decades.
Given this reality, the relationship between the United States and China has in the past functioned according to something of a “separation principle.” The two sides have worked to make progress on areas of common interest, while also vigorously litigating issues of disagreement. By my reckoning, this has served both countries well.
The question going forward is whether this approach continues. At present, the U.S. Administration is placing more emphasis on areas of disagreement in the economic relationship—for example, the size of China’s bilateral trade surplus with the United States, the magnitude of Chinese capacity in industries such as steel and aluminum, and the nature of China’s economic interactions with North Korea. There is a real risk that these issues of disagreement will overshadowand stymie progress on other common interests.
What might an affirmative agenda look like? First, in the closing days of the previous Administration, the two sides were making good progress toward a high-quality Bilateral Investment Treaty. This kind of agreement holds the prospect of benefiting both countries. It would help level theplaying field for U.S. firms in China, motivate reforms in the Chinese economy,and also layout transparently what Chinese firms can expect as they compete in the United States. Further steps to encourage China to act a responsible stakeholder in the global system would also be mutually beneficial. Consistent with this, the two sides could work together to continue to reform and strengthen the functioning of the IMF, World Bank, and other MDBs. A more ambitious undertaking would be joint efforts to bolster and strengthen the multilateral trading system. These are just examples of areas that would benefit from mutual collaboration.
CF40:China’s M&A in the United States has encountered regulatory obstacles, particularly in high-tech industries such as semiconductors. Is it possible to make a break-through on relevant issues during Trump’s visit?
Nathan Sheets:Chinese acquisitions of existing U.S. firms are subject to review under the CFIUS framework. The statutory mandate of CFIUS is specificand concrete. The single issue considered is whether the proposed take over poses any national security threats to the United States. The process that CFIUS uses to evaluate this question is disciplined, with key elements also outlined in statute.
Given that the features of the CFIUS process are determined by U.S. law, this is not an area where the Administration has much negotiating flexibility. The United States can make efforts to better explain how the review works and what is expected, but there is little scope to modify the parameters of the review without action from Congress. To this point, however, there are currently proposals circulating in Congress that would go in exactly the opposite direction. There is significant political support for expanding the remit of CFIUS to give the process greater flexibility to review and, possibly, reject foreign investment into the United States.
There is strong evidence that foreign investment into the United States stimulates U.S. growth and employment. It is imperative that the United States remain open to such inflows. By the same token, the United States has legitimate national security interests that need to be protected, and foreign firms considering investment in the United States must be cognizant of this fact. My feeling is that the structure of the CFIUSprocess has done a good job of balancing these offsetting considerations. A tougher question is whether the United States also has economic interests that should be protected. My instinct is that, in general, the economy is best served by allowing foreign investment to flow. But even there, a case can be made that it is appropriate for the United States to have tools to address a concerted effortby a foreign country to acquire a large swath of an industry that produces some critical technology.
CF40:Fed monetary policy under Jerome Powell? Potential impacts on China’s monetary policy, the RMB, etc.
Nathan Sheets:Federal Reserve monetary policy under Jerome Powell is likely to continue on a trajectory that is broadly consistent with what has been seen in recent years. Given the behavior of inflation and unemployment, rate hikes are likely to continue—but at a pace that will remain gradual and, in any event, that will depend on the features of the incoming economic data. The Fed will continue to slowly pare its balance sheet, and will do its best to communicate the overall rationales for its policies to the public and the markets. On financial regulation, the Powell Fed is likely to continue to pursue policies to encourage a strong and well-capitalized financial system. That said, the Fed will now be looking for opportunities to temper regulatory demands, to the extent that such actions can be taken without jeopardizing financial stability. This could include somere calibration of the enhanced leverage ratio, modifications to the Volckerrule, and some easing of the Fed’s stress tests.
The implications of all of this for China are likely limited. Federal Reserve policy will remain regular and predictable, with few surprises compared with recent history. The bigger question involves the more general outlook for the U.S.economy. This also seems quite favorable,with solid and relatively balanced growth poised to continue through the year ahead and likely beyond.
