By Rick Amato
One thing which has come through loud and clear during the first two months of the Trump administration is that the President talks a bold, aggressive game on an issue at the outset, and then tends to soften his tone as time passes. A hallmark feature of the art of the deal. Set strong expectations with your negotiating rival early in the process in an attempt to gain valuable leverage later.
The President’s talk regarding China has been no different. During the campaign he accused China of manipulating its currency and stealing American jobs, then shortly after the election Trump appeared to question America’s “One China” policy in a phone conversation with the Taiwanese president. China accused the Trump administration of stirring up unnecessary tensions. But then during a February phone call with Chinese leader Xi Jinping, Trump backed away from his “One China” criticism and said the U.S. would recognize the policy. The White House later described the call between the two leaders as “lengthy” and “extremely cordial”. Fittingly many in the U.S. media mistakenly reported that Trump had “blinked” and backed down when instead they failed to recognize that, right or wrong, it is his chosen style of negotiations.
Now President Trump is about to meet with his Chinese counterpart Xi Jinping sometime in April at the likely location of Mar- a- Lago, Florida. As Axios is reporting the big sleeper in the U.S. – China relationship is the automobile industry and it is here where President Trump has great leverage.
Key background information:
– China imposes a nose bleeding ‘25% in import tariffs’ on U.S. automakers for cars sold in China. To avoid the steep tariffs, 96% of the 27.5 million U.S. cars sold in China last year were built there.
– However when U.S. automakers build in China, they are required to form joint ventures with Chinese companies. Those Chinese companies must own 50% or more of the new venture.
– On the other hand, the U.S. imposes tariffs of only 2.5% and permits foreign car companies to own their entire U.S. based operations.
– U.S. companies have lived with these rules since the ’90s because the Chinese market is so lucrative. However President Trump and his top strategic advisors — Steve Bannon and Stephen Miller – and his Director of National Trade- Peter Navarro (who is a democrat by the way)- believe the current system is unacceptable.
The way Trump and his team sees it China currently exports very few autos into the U.S. and is anxious to sell dramatically more. This is where Donald Trump has leverage: He is perfectly positioned to negotiate the terms of China’s market entry using tariffs and ownership restrictions as his bargaining chips.
What the Trump strategy could look like: Michael Dunne, author of the book “American Wheels, Chinese Roads”, has three rules of advice for American negotiators when dealing with China:
1. If the Chinese want to sell their cars to Americans, they must invest in plants in America.
2. Chinese companies will be free to own 100% of their operations in America – provided that American car companies get the same rights in China. If the Chinese refuse, then America will reciprocate.
3. Profits from operations stay inside the United States. Repatriation to China will be limited and will require approvals from the the U.S. government.
The automobile industry is one of the world’s largest. My sources close to the administration and Axios both report that President Trump and his team are still formulating their negotiations strategy. If not handled properly the outcome could have a profound affect on the future relationship between the two nations. On the other hand, if handled properly it will have a turbo-charge affect in creating the millions of new jobs which the President has promised and in putting America on the road to 4% economic growth which he has also promised. Keep a close eye on the Trump – Xi Jinping trade talks in April. How it’s handled and its’ eventual outcome are perfectly positioned to define the legacy of the Trump presidency.