U.S. ‘Shouting’ at China Risks a Spiraling Trade War, Lew Says

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  • Obama’s Treasury Secretary Lew spoke in interview in Beijing
  • Lew says U.S. tax cuts widen deficit in ‘dangerous experiment’
Lew calls the steel and aluminum tariffs "risky" and sees the risk of retaliation as a real threat.

The U.S. should engage China on trade instead of having a “shouting match,” former U.S. Treasury Secretary Jacob J. Lew said.

“Conflict isn’t going to resolve a lot of those issues,” Lew said Wednesday in a Bloomberg Television interview from Beijing. There’s a risk that the rhetoric could spiral out of control into more serious conflict, and the U.S. should work toward better outcomes instead of being an outlier on global trade, he said.

“From a U.S. perspective, there’s a lot of opportunity to invest in China, there’s a lot of opportunity for U.S.-China economic relations to lead to mutual benefit, but only if China plays by the rules, and only if the U.S. does the same,” said Lew, who served through the end of the Obama administration.

Lew’s successor, Treasury Secretary Steven Mnuchin, addressed Chinese officials during the Group of 20 meetings in Buenos Aires this week by reiterating that trade must be free, fair and reciprocal, said a person familiar with the matter who declined to be named because the talks were private. Mnuchin argued for China to adopt a market-oriented trade regime so economic forces could work more efficiently, the person said.

Read More: China Pledges Action on Tech Transfer as Trump Plans Tariffs

On Tuesday, China made further promises to protect the intellectual property of foreigners investing in its economy, addressing a long-standing grievance as U.S. President Donald Trump plans new tariffs aimed at Beijing. The White House plans to impose tariffs worth as much as $60 billion on Chinese products as soon as this week, according to people briefed on the matter.

“What the world does not need is a trade war,” Lew said. “These tariffs are risky. You asked me what this means for the U.S. and China, it’s much bigger than that. Once you start putting tariffs in place that other countries don’t think are fair, the risk of response and retaliation is very real.”

Read More: Trade War Lite Between U.S., China to Hurt Both But Not Fatally

Lew said risks of uncertain policy and questions about U.S. leadership don’t help the economic outlook and that it’s uncertain whether the country can preserve its legacy of being a foundation of global stability and security.

“This is a question about the U.S. place in the world.” Lew said. “We’ve had for the last 70 years an alliance system with Europe and Asia where our allies around the world could rely on us being the protectors of the rule of law. I worry that policies that weaken our leadership in the world have much bigger consequences.”

China Links

Lew said he has worked very closely with both Yi Gang, who was appointed this week as China’s first new central bank chief in 15 years, and President Xi Jinping’s chief economic adviser Liu He, who was elevated to vice premier.

“Both are committed to reform,” Lew said. “They’re both very knowledgeable about the economy and they understand what China needs to do to have a strong economy, and they understand the global economy. The challenge is, as policy makers, will the technocratic view or the political view prevail?”

Read More: U.S.-Trained Technocrat, Not a Powerbroker, to Lead PBOC

In working with both, it wasn’t a question of making a case for many things that we want to engage on, it was more a question of “how to talk through what is the pathway toward doing that in a way consistent with stability in China,” said Lew, who is now a partner at private equity firm Lindsay Goldberg in New York.

‘Dangerous Experiment’

Lew said he’s encouraged by Beijing’s work to ensure financial stability.

“Debt is a big risk,” he said. “China has the tools to manage through it, and I think the longer you wait to do that the harder it is, so the signs that you see that they are beginning to manage it is something that’s a good thing.”

On U.S. policy, Lew said the administration’s tax cuts are a “dangerous experiment” that ultimately won’t help the economy and may fuel risk as they widen the deficit.

“You’ll get this flash that comes from throwing oil on the fire, but in the long run, higher interest rates are going to take that down and what you’re going to be left with is a bigger deficit, a bigger debt, and no tools on the fiscal side to respond with,” said Lew.

“I worry that a tax cut that’s going to deepen inequality isn’t going to solve the problems of people who were drawn to populism of the right and left in the last election,” he said. “It’s a very cynical response to those concerns.”

— With assistance by Kevin Hamlin, Tom Mackenzie, and Haze Fan

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