China explores limiting its own exports to mollify Trump

Chinese officials weigh Japan’s 1980s strategy – restraining exports while charging more – for products such as electric vehicles or batteries.

An auto-parts plant in Suqian, China. Picture: Fang Dongxu/Zuma Press

During Donald Trump’s first presidency, China was determined not to yield to American pressure over trade like Japan did in the 1980s.

Now, faced with an even greater economic assault from the second Trump presidency at a time of sluggish growth at home, Beijing may take a page from Tokyo’s playbook – on one specific issue it sees as in its own interest.

Like Japan decades ago, China is considering trying to blunt greater US tariffs and other trade barriers by offering to curb the quantity of certain goods exported to the US, according to advisers to the Chinese government.

Tokyo’s adoption of so-called voluntary export restraints, or VERs, to limit its auto shipments to the US in the 1980s helped prevent Washington from imposing higher import duties.

Honda vehicles at Yokohama port in Japan. Picture: Toru Hanai/Bloomberg/WSJ

A similar move from Beijing, especially in sectors of key concern to Washington, like electric vehicles and batteries, would mitigate criticism from the US and others over China’s “economic imbalances”: heavily subsidised companies making stuff for slim profits but saturating global markets, to the detriment of other countries’ manufacturers.

President Trump has already imposed cumulative new tariffs on China of 20 per cent, on top of those levied in his first term and largely maintained by President Joe Biden. No negotiations have yet taken place between Beijing and Washington. But Treasury Secretary Scott Bessent late last month raised concerns over China’s market-distorting practices during his introductory call with Chinese Vice Premier He Lifeng, positioned to be Xi Jinping’s chief trade negotiator with the Trump administration.

According to the advisers to the Chinese government, it is partly because of the potential US pressure on this issue that China’s economic officials are exploring emulating aspects of the Japanese approach. The Xi leadership has indicated a desire to cut a deal with the Trump administration to head off greater trade attacks.

Japan first agreed to limit exports of cars in 1981. Exports fell by about 8 per cent from the previous year as a result.

Doug Irwin, an economics professor at Dartmouth College and author of Clashing over Commerce, notes that the restraints were particularly binding in the mid-1980s. But by the early 1990s, the VER was no longer needed, in part because by then Japanese companies were building cars for the US market at local transplant operations.

President Trump and Chinese leader Xi Jinping at the G-20 summit in 2019. Picture: Kevin Lamarque/Reuters/WSJ

One reason Japan was willing to limit exports was that its companies could charge a higher price per car on a smaller number of cars sold, Irwin says. The price of an average Japanese car rose by about $US1000, roughly $US3500 ($5580) in today’s dollars, and Japan also began to export larger, higher quality cars as a result of the restraints.

Similar to Japan, the Chinese advisers say, Beijing may also consider negotiating export restraints on EVs and batteries in return for investment opportunities in those sectors in the US In some officials’ views, they say, that might be an attractive offer to Trump, who at times has indicated an openness to more Chinese investment in the US even though members of his administration firmly oppose it.

Beijing’s economic imbalances aren’t new but have been made worse in recent years by Xi’s policy of encouraging factories to pump out more goods, regardless of domestic demand, that can keep China’s economy running in the event of severe Western sanctions or an outright conflict.

The Biden administration repeatedly warned the Chinese leadership that output by China’s enormous manufacturing machine had gotten too large for the world to absorb. In the final year of Biden’s presidency, the US raised tariffs on Chinese steel, EVs and other products.

“The insistence of the Trump administration on using tariffs as a tool of trade policy might make China receptive to voluntary export restraints,” Irwin says.

The export-restraints discussion doesn’t mean Beijing has any intention of changing its manufacturing-centric policy, the Chinese advisers caution. Rather, they say, some officials view it as an option Beijing can use in negotiating with the Trump team and even help China move up the value chain.

Cargo containers are seen at Xiasha Port freight yard in Hangzhou, China. Picture: Cfoto/Zuma Press/WSJ

As Irwin points out, the premium charged by Toyota and other Japanese exporters back then gave them the profits to finance an upgrade from smaller, cheaper vehicles to larger, more profitable cars that competed more directly with their American counterparts. That is the kind of upgrade Beijing would hope for if it follows the Japanese path.

However, Irwin and other economists also note that it would be all but impossible to rebalance all of US-China trade through VERs. China’s $US295 billion trade surplus with the US is the widest of any US trading partner.

Another obstacle is the difficulty of enforcing VERs, particularly when Chinese companies export to the US from third countries including Mexico and Vietnam. In addition, Trump likes the revenue from tariffs and may find the idea of VERs unappealing.

And Beijing has yet to find out what Trump wants. He has directed federal agencies to assess the economic relationship with China.

The review, due in early April, will then initiate a process within the administration for evaluating how to address trade issues with China.

“If I were the Chinese, I’d put VERs on the table or at least have them in my back pocket,” says Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics.

– Dow Jones Newswires