President Trump's high-stakes meeting with Xi Jinping this week comes as the U.S. prepares to put more pressure on China to alter trade policy--the results of which could have a significant impact on many U.S.-based entrepreneurs.
Trump is reportedly expected to sign an executive order on Friday targeting countries that dump steel into the American market. That could directly implicate China. The news comes on top of two previously announced executive orders focused on lessening the U.S. trade deficit, which exceeded $500 billion in 2016.
These moves are seen as a clear jab at China, which accounts for the vast majority of the deficit (some $347 billion in 2016.) On the campaign trail, Trump attributed the deficit to what he deemed "unfair" trade policy; he charged China, in particular, with currency manipulation. At one rally in Fort Wayne, Indiana, he insisted: "We can't allow China to rape our country and that's what they're doing. It's the greatest theft in the history of the world."
President Xi has his work cut out for him. Even if he is able to get Trump to soften some of his views, here are four things that the U.S. President could do to lessen America's trade deficit with China.
1. Increase Tariffs on Chinese Imports
Trump has vowed to raise taxes on Chinese imports by as much as 45 percent. By way of one of his executive orders from last week, Trump has called on the U.S. Department of Commerce to assemble a report on the root causes of the trade imbalance. Once the 90-day study closes and Commerce finds "differential tariffs"--that is, low duties on Chinese imported goods compared with imported U.S. goods in China--as contributing to the deficit, Trump may well make good on his promise.
This has entrepreneurs like Cody Sound Rink sells is made in China. Should Trump raise tariffs, it would cost more to import items like lanyards and flags, and Sound Rink may need to raise prices. "That would be a huge thing for us," says DeLong, whose business generated more than $5 million in 2016 sales--helping it land at No. 232 on last year's Inc. 5000. "We would have to reevaluate some of our prices, and then the hassle of going overseas may not be worth it." At present, the cost for Sound Rink to make a lanyard in China is just 35 cents, compared to nearly $1.00 it would cost stateside, he says.DeLong nervous. Much of the merchandise that his Portland, Maine company
What's more, China could retaliate by raising tariffs on U.S. goods, suggests Ari Ginsberg, a management professor at New York University's Stern School of Business where he has a focus on international business. He notes that this will be especially problematic for startups that sell products to Chinese consumers, as their profit margins could shrink.
Others worry individual U.S. companies may get targeted. Fred Crosetto, the founder and CEO of Ammex, a disposable glove distributor based in Kent, Washington, has seen his Chinese business grow by nearly 70 percent year-over-year. China accounts for roughly a quarter of the company's $110 million revenues, and by 2020, he says it could climb to 40 percent. If Trump raises tariffs, Crosetto warns, "the Chinese government would make it exceptionally hard on American companies in the short-term and probably the long-term too."
2. Reduce the Value of the Dollar
The U.S. could dial back the trade deficit by trimming the value of the dollar, suggests Dean Baker, co-director of the non-partisan Center for Economic and Policy Research. "We should be looking to reduce the value of the dollar against other currencies," he tells Inc. "This would improve the competitive position of U.S. goods and services."
A strong dollar, by contrast, could make imports cheaper, but it could also make exports costlier. This can lead to the loss of American jobs, and hurt companies that do business abroad--not just in China.
Baker also argues that the U.S. should be looking to stimulate the European Union. If the economies grew by as little as five percent, he says, the deficit could recoup some $30 billion.
3. Label China as a Currency Manipulator
On the campaign trail, Trump repeatedly threatened to label China as a "currency manipulator." Although this claim has been largely discredited, it is a possible recourse. If it happens, the U.S. would be required to take a year to negotiate with China. It could then take small steps to strike back, such as limiting financing for programs through the U.S. Overseas Private Investment Corp. (Though, it's worth noting that the U.S. had already suspended OPIC operations in China as part of sanctions following the 1989 Tiananmen Square protests.) It could also limit Chinese investment in the U.S. However, the immediate impact would be minimal, say analysts.
4. Spur Domestic Production
The Trump administration may look to increase domestic production. One way to do so would be relaxing restrictions on drilling for oil and gas companies, the CEPR's Baker suggests. Energy firms could see small gains in the short-term, by drilling in lower-cost locations and expanding profit margins, but he expects the long-term effect would be minimal.
"There would be some modest gain to oil and gas companies, but realistically, they already have tons of places to drill," he notes. In theory, the move could also drive down oil prices, so businesses that rely on fossil fuels may see savings.
Another way to lessen dependency on imports, suggests Baker, is to reduce safety, environmental and labor regulations stateside, which would make it cheaper for businesses to operate and manufacture in the U.S. "This can have a slight positive effect. It's cheaper to produce stuff if I get to throw my waste on your lawn, but it is not a long-term way to reverse the trade deficit," he adds.
Of course, small businesses could shave their costs, but they may face other risks. "If a business eliminates pollution controls in the workplace, you [may] have an increase in industrial accidents," says Robert Scott, the director of trade and manufacturing policy research at the left-leaning Economic Policy Institute.
An Uncertain Future
Of course, this may all be brinkmanship on behalf of Trump. That's the view of Sound Rink's DeLong. "I feel like he's all talk," says the entrepreneur. "The executive orders have been more like a show than anything."
Crosetto of Ammex doesn't rule anything out, however. "Time will tell," says the entrepreneur, speaking by phone from a business trip to the euro zone. "Whatever I thought about Trump 60 or 90 days ago, I don't know anymore."