With less than 90 days to go in the current round of U.S.-China trade negotiations, will President Trump’s China policy yield meaningful results?

First let’s look at the issues from China’s perspective. On one level, it is difficult not to have some sympathy for China’s President Xi Jinping. The Trump Administration has set a 90-day deadline for action on trade issues, but there is no clear consensus on the U.S. side defining an acceptable outcome. And some of the stated U.S. goals fall outside the scope of trade policy, such as correcting the trade balance or adjusting China’s national industrial policy. These are fair questions about Beijing’s “Made in China 2025” industrial policy, but do Administration negotiators expect China to abandon its high-speed rail network or to restructure its steel industry in a 90-day timeframe?

Even where feasible goals exist, U.S. stagecraft potentially makes these more difficult to attain. No Chinese President can appear to be caving to U.S. demands. Xi must be seen foremost as a defender of current Chinese policies and institutions. When U.S. power pushes, a domestic political requirement in China demands a push back. Trump signals his awareness of this danger when he offers public praise of Xi, because that gives Xi some maneuvering room.

Now let’s look at these issues from a U.S. perspective. Some sympathy for Xi is understandable, but only some. The trade issues that raise hackles in the United States and around the world are substantially of China’s own making. China’s tariffs are out of step with world norms. China has closed entire segments of its economy to competition. It is weak on a range of intellectual property issues from compulsory licensing to lax enforcement. Its industrial policy is a mish-mash of nationalism, mercantilism, and protectionism. And all of these problems have gained in saliency simply because of the heft of China’s economy.

In short, while China has benefited significantly from the growth and liberalization of the world economy over the past 30 years, its own economic liberalization has lagged. That amounts to something between cherry picking and beggar-thy-neighbor rules arbitrage. It’s good work if a state can get it, but there is no reason any state should expect to keep it.

Compare the Big Four economies: China, the United States, Japan, and the European Union. These four economies account for over 80 percent of world GDP and over 90 percent of world trade. A look at their tariffs rates illustrates the problem:

Economy               MFN applied tariff (Simple average)

EU                              5.1%

Japan                         4.0%

US                              3.4%

China                        9.8%

Source: WTO (2017)

So even with the points of sympathy noted above, China is the most protectionist of the leading economies, and the burden is on President Xi to deliver some material improvements in trade policy in this 90-day window, enough to forestall a hike in U.S. tariffs to 25 percent and to keep the U.S. side at the negotiating table.

Xi has already laid the groundwork for some improvements: China hosted its first International Import Exposition in November, Xi has issued public pronouncements about the need for import reform, there have been substantive moves such as liberalizing the free trade zones, and, on Christmas Eve, China announced a tariff reduction on some 700 items—although most of these adjustments were promulgated as “provisional.” Translation: They can be undone on command.

Still, China has shown itself capable of tackling trade issues. Here are a few more steps Xi can take to help China reform, all within the 90-day timetable:

1. Eliminate nuisance tariffs. A nuisance tariff is defined as a tariff that is 2 percent or less. At this level, the tariff can remain an impediment to trade, but the cost of administering the tariff can exceed any revenue benefit. Nuisance tariffs are typically the arithmetic residue of successive rounds of tariff cuts. The WTO reports that only 3 percent of Chinese tariff lines are subject to these nuisance tariffs, which would make this a modest but readily obtainable victory for trade.
2. Eliminate outlier tariffs. An outlier tariff is a tariff that is the worst of the Big Four. In other words, Xi can commit that for each tariff line China will not be the worst of the group. For example, auto tariffs in the European Union are 10 percent, in the Japan they are zero, in the United States they are 2.5 percent, and in China they are 15 percent (reduced recently from 25 percent). Xi could reduce China’s auto tariffs to match the 10 percent of the European Union and he will have eliminated an outlier tariff on China’s docket. To put this in the clearest case: If there are tariff line items that are at zero for the United States, Japan, and the European Union, then China should also move its tariff to zero for that line item.
3. Enforce WTO Rulings. The WTO ruled in 2012 that China was in violation of its agreements to allow competition in payment networks, so that Visa, Mastercard, and American Express could compete with China Union Pay for RMB-denominated business. But China has yet to enforce this ruling. China could dispel its reputation for disregarding the law by enforcing outstanding rulings. What better way to send a signal to the world that China is playing fair exists than by enforcing rulings that allow foreign businesses to compete.
4. Set guardrails for industrial policy. China has begun to downplay its “China 2025” initiative, but it is unclear if that is a result of a de-emphasis of the program or simply a recognition that it is an irritant in trade relations. Xi could clear up this confusion by promulgating some general principles regarding industrial policy. For example, that China will begin to corporatize state-owned enterprises so that they are not indefinitely subsidized. Similarly, he could direct all such subsidies to be publicly listed and require government bodies not to discriminate against foreign suppliers.

These four steps will not solve the universe of China trade issues, but they would represent a material improvement. They might close half the gap between China’s tariffs and those of the other “Big Four.” All of these moves would also benefit the Chinese economy by allowing for less expensive inputs, moderating inflationary pressure, providing some budget discipline, and showing the world that China and the United States can work together and responsibly step back from a trade war. Critically, Xi can present these as plurilateral initiatives, ones that apply to all WTO members, and not simply a response to U.S. policy.

President Trump can take certain steps as well. He could keep the pressure on Beijing by removing the steel and aluminum tariffs from all trading partners except China. Trump could also re-initiate discussions with other Asian nations regarding the former Trans-Pacific Partnership, which, without U.S. participation, is now in effect as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. If Xi is shrewd, he would realize that Trump is presenting him with an opportunity to clean up China’s market distortions and inefficiencies. But Xi would have to proceed in a fashion that would allow Trump to take credit for these moves. Perhaps the 90-day framework could result in a win-win outcome after all.