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If the U.S. and China Make a Trade Deal, Then What?

A ChinaFile Conversation

The U.S.-China trade war has always been about more than just trade. Among other issues, it represents a move towards the decoupling of the two economies and “the culmination of decades of pent-up frustration within the United States over China’s failure to make good on the promise of its 2001 accession to the World Trade Organization (WTO),” the analyst Elizabeth Economy writes in a recent essay.

Viewpoint

04.30.19

Trade: Parade of Broken Promises

Elizabeth Economy from Democracy: A Journal of Ideas
The trade war between the United States and China has not given either side much to cheer about. As of January, Washington has levied 10 percent tariffs on U.S.$250 billion in Chinese goods, and China has reciprocated with similar tariffs on U.S.$...

Sometime within the next few weeks, Washington and Beijing may call a truce on the trade war. A potential deal could include steps to balance the trade deficit—a longtime frustration for President Donald Trump. What issues would the resolution of the trade war help solve? And what problems in the U.S.-China relationship are more likely to fester? How would a deal play in each country’s domestic politics, and how might that influence the overall state of the bilateral relationship? —The Editors

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The upcoming deal benefits both countries in the near-term by removing the current threat of tariff escalation. Pockets of the U.S. economy will gain modestly from concessions by China in areas such as boosting imports of U.S. crops and expanding market access for financial services firms. But this truce is both fragile and limited. It does little to address the heightened geopolitical competition and fundamental divergences in economic models that the trade war has laid bare.

The technology competition at the heart of the trade dispute will continue uninterrupted; both countries view it as critical to their intensifying economic and military rivalry. Washington and Beijing will use non-tariff measures, such as investment restrictions and regulatory actions, to seek independence from each other in strategically important sectors such as 5G networks and artificial intelligence. Such barriers will make it difficult for the two countries to share innovation and hamper the ability of global supply chains to link the two economies as efficiently as in the past.

The agreement will largely fail to accomplish U.S. aims to scale back Beijing’s intervention in China’s economy. Market reformers in China will seek to use the deal to advance economic liberalization measures domestic opponents have blocked, such as opening more sectors to foreign investment and reducing industrial subsidies. But the openly geopolitical nature of the trade dispute—with U.S. officials publicly celebrating China’s economic slowdown under tariffs, and taking aim at Chinese firms like ZTE and Huawei—does more to strengthen China’s nationalist voices and Xi Jinping’s statist impulses. It only furthers China’s determination to achieve self-reliance from the U.S. in areas such as semiconductors and software.

The fundamental divide between U.S. and Chinese interests on core issues means the deal’s implementation is likely to be rocky, with a real risk that the U.S. will reimpose tariffs in the next one-two years. American companies in China may see improvement in the formal business environment, but will still face pervasive informal obstacles where China sees an advantage to limiting the role of foreign firms. For China to create a more level playing ground would require economic necessity or a coordinated multilateral campaign—which the U.S. has thus far failed to muster—rather than unilateral U.S. pressure.

The U.S. political establishment will grow more hostile towards China in coming years, driven by consensus that it is the country’s most formidable strategic competitor as well as frustration with China’s lack of political and economic reform. Trump’s hard-edged campaign against China now ensures that both parties will compete in upcoming elections on who can be toughest against Beijing.

Ultimately, the shortcomings of Trump’s trade deal will force the U.S. to develop a more unified and coherent strategy towards China. It should involve taking the strong point of Trump’s approach—recognition that the past mode of U.S. economic engagement was not working—and addressing its major weaknesses: the failure to fully enlist allies such as the EU and Japan, and the missing link to domestic policies to boost U.S. economic and technological competitiveness.

It appears likely that the U.S. and Chinese governments will soon announce a bilateral deal addressing a range of longstanding economic differences, as well as the tariffs initiated by the Trump administration and by China in response. Assuming they do reach an agreement, observers should not ask which country or which political leaders came out ahead, but rather which economic interests were served in this chapter of the U.S.-China story.

For sectors affected by tariffs, the analysis may be relatively straightforward. If one interest group’s projected gains from a new agreement exceed the costs of the disruption caused by the tariffs, they see a win. In sectors like agriculture, where China is rumored to be offering large-scale purchase commitments, observers may be able to judge fairly accurately whether the Trump team’s tactics paid off.

But no 2019 deal will solve every U.S.-China economic problem. That’s because the two societies and their governments are only starting to reckon with the challenges that will come with emerging technologies and their deep integration with social and economic systems. Still, the U.S. government and various U.S. businesses have numerous gripes with Chinese digital economy and cybersecurity regulation, especially regarding the 2017 Cybersecurity Law and conditions of access to China’s cloud services market.

Until March, Chinese negotiators reportedly refused to discuss issues such as cross-border data flows, cloud computing, and cybersecurity. With those matters taken up in recent talks, however, what specifically the U.S. side wants, and what the Chinese side can give, is tough to discern. This is in part because (as Samm Sacks, Paul Triolo, and I have written) a wide range of Chinese government regulations and standards affecting digital economy sectors are in draft form or still awaiting release. Moreover, the U.S. government is far from a comprehensive and transparent regulatory regime on issues regarding market access, data protection, or cybersecurity. Neither side has a well-defined status quo against which to measure wins or losses.

It’s possible there will be no Chinese commitments on issues important to U.S. digital economy interests. Even if there are some, they will be partial at best—and this is as it should be. Sectors such as data-driven technologies, artificial intelligence applications, and 5G wireless are simply not mature enough to anticipate all of their domestic challenges, let alone their bilateral implications. Observers should thus take any emerging deal as what it is: one milestone in a story of bilateral economic push-and-pull, serving different interests at different times, stretching from Reform and Opening through WTO accession, through the now-shelved bilateral investment treaty negotiations. The “Trump shock” will be a major milestone, but it won’t be the last—especially when it comes to data, new connectivity, and autonomous systems.

However a truce is reached, the trade war has cast doubt on the U.S.’ long-standing but ill-conceived engagement policy, and brought competitive rather than shared interests between the two countries to the forefront of the relationship. The trade war has forced both countries’ leaders to find a solution not only to the alarming trade imbalance, but also to China’s trade misconduct, which engendered the imbalance.

The Trump administration no longer portrays China as a transitional state whose long-term trajectory will converge with American values and interests. Instead, it has gone further than any of its recent predecessors in confronting China. Focusing on advancing American economic and security interests rather than its ideals, and prioritizing reciprocity above economic cooperation, the Trump administration has declared China a strategic competitor and escalated a trade war into a multi-front conflict.

Although Beijing initially responded with tit-for-tat reactions, the trade war has harmed the Chinese economy much more than the American economy. For China, no alternative to the American market is as big or as lucrative. And China’s tight import controls have hurt not only American producers but also Chinese consumers. Ordinary Chinese would welcome reduced import tariffs, which would mean cheaper foreign products and services for Chinese consumers. Additionally, the U.S.-China trade war has exposed the Chinese leadership to criticism: that it has been overconfident about China’s leverage, over-reached in terms of foreign policy objectives, and miscalculated the Trump administration’s strategy.

It is not surprising that the two countries may soon reach a comprehensive deal to temporarily settle the trade war since it involves big economic risks not only for the Chinese economy but also for the American economy. Its effects are destructive for the complex supply chains so crucial to many American companies’ success globally. It will be temporary because the Trump administration’s China policy is fundamentally transactional. Putting maximum pressure on China and dancing erratically in pursuit of better “deals,” President Donald Trump’s personal approach to China has hardly amounted to a sustained and coordinated grand alternative to engagement. Through the retrenchment and readjustment needed to meet Trump’s transactional demands, President Xi Jinping has continued to pursue his China Dream of Grand National Rejuvenation. And he believes state-led capitalism, including a heavy-handed industrial policy, is a successful model for him to realize the dream. Although the constant drumbeat of press coverage for “Made in China 2025” has diminished, China will not give up its industrial policy simply because of American pressure.

Sadly, no matter how comprehensive the trade deal may be, it will not help stop or even reduce the unprecedented economic and geostrategic competition between the two largest economies and heavily militarized nuclear powers. But neither the U.S. nor China can afford to decouple or disengage from the other, because a violent confrontation serves the interests of neither. The two countries are not natural partners, but not inevitable enemies either. Competition does not mean decoupling their economies, much less war. In spite of all the criticisms and flaws, engagement remains the foundation for healthy competition.

The trade dispute with China and the negotiations to remedy some of its most egregious inequities sometimes make it seem that if we could only resolve this issue, it would right the whole Sino-U.S. relationship and restore it to a state of healthy equilibrium.

Alas, nothing could be farther from the truth.

Even if the Chinese do sign some delicately calibrated agreements to protect IP, open markets, and agree to buy billions more in soybeans and Boeing aircraft, China will still be run by an increasingly Leninist, mercantilist, statist leadership that believes in maintaining and subsidizing an economically dominant state-owned sector, putting “private” entrepreneurs and companies on notice that they exist only at the sufferance of the Chinese Communist Party, a highly regulated and censored media and Internet, extrajudicial punishment, political thought reform, severely constrained religious institutions, and Party dominance over the rule of law.

While such a system can have certain developmental advantages, it will never be able to merge with the market-based economies of liberal democracies—at least not with any real congruence. Add China’s growing tendency to use its new wealth and power to skirt the fragile rules-based global order and engage in self-serving belligerent and bullying behavior to get its way around the world, and we are left with a recipe for conflict that will make it difficult for even the most skilled negotiator to find common ground.

The Trump administration is right to challenge China with tariffs in the hopes of rectifying some of the inequities that have persisted like a low-grade infection for too long in our trade and investment relations. However, the bitter reality is that the dysfunctional aspects of our trading interaction—intellectual property theft, whole sectors of the Chinese market shut to U.S. entry, currency manipulation, arbitrary detentions of businessmen and consultants, etc.—are hardly isolated problems that, once adjusted, will allow the ship of bilateral trade and the overall relationship to right itself. They are expressions of two economic and political systems that are in almost every way the obverse of each other. Thus, the inability of American businesses to operate comfortably in China is part of the far larger problem that China not only has a system and structure of government borrowed from Joseph Stalin’s USSR in the 1950s, but has now abandoned the pretense of reform under Xi Jinping and is moving farther away from, not closer to, convergence with our own system.

In sum, because our bilateral relations face far more than a friendly competition in need of a few minor adjustments to function smoothly, we’d be foolish not to recognize that behind the current dispute over tariffs lie two very different systems of governance, as insoluble as oil and water. Especially as the Chinese state becomes more interested in using its economy as a strategic tool in increasingly adversarial ways that have both a military and geopolitical dimension, it would be naïve to imagine that a trade deal will be anything more than an epiphenomenon.

Donald Trump and Xi Jinping, both motivated by domestic political concerns, are now eager to end the trade war. President Trump has faced opposition from U.S. agricultural and high-tech sectors, both hurt by the trade war. Even if the U.S.’s trade deficit decreases, a prolonged trade war could adversely affect other economic drivers, such as investment and technological innovation.

For Xi, who is facing China’s lowest economic growth since 1990, resolving the trade war will deflect attention away from two important and dissatisfied social groups. Even moderate intellectuals have now openly criticized Xi for his tightening of political power and the Chinese Communist Party’s apparatus of stability maintenance. They have also criticized Xi’s anti-corruption campaign, which has left those with personal ties to him largely untouched. (The dissenters have been silenced through marginalization and arrest.)

More recently, on the global open-source software platform Github, Chinese high-tech workers launched the 996.icu campaign against the 12 hours a day, six days a week schedule. Organizers thus far call only for the enforcement of labor laws and may still shift to a company-level approach instead of collective mobilization, which would more likely trigger a government crackdown. (An editorial published in state media Xinhua supported the call for labor law enforcement, but Chinese Internet giant Alibaba Chairman Jack Ma has defended the work system.)

The tech war between the United States and China hangs in the balance. China’s growing capacity to compete in such areas as 5G wireless standards, artificial intelligence, and green tech reinforces the complex interdependence of China’s global economic rise. China’s regulatory state—part of Beijing’s globalization strategy and predating Xi’s ascendance—has aimed to enhance Party legitimacy and political stability and develop a national technology base.

To maximize the benefits of knowledge and technology transfers and employment, over the last few decades the Chinese government has welcomed trade and foreign direct investment and then deliberately calibrated rules on market entry, investment level, business scope, domestic contents, and ownership structures. With so many multinational corporations doing significant business in China, Chinese regulators and courts now regularly exercise their influence over global markets to advantage indigenous Chinese industry, particularly in the high-tech sectors identified by Made in China 2025 and other industrial plans.

Trade war or not, the implementation of China’s regulatory state will continue to enhance China’s position in the tech race. China’s recent offer to increase imports, the new foreign investment law, and new penalties on intellectual property violations do not change the dominant patterns of market governance. Moreover, China’s management and response to the political pressures of the forces which have contributed to regime stability and China’s global competitiveness will further shape the future of U.S.-China relations.

It is possible that some sort of a trade deal between Washington and Beijing will be announced shortly. There are a number of problems that an agreement could resolve, and the broad outlines of a deal remain the same as when Trump and Xi Jinping last met in December 2018. But regardless of the outcome, tensions between China and the United States are unlikely to abate. The fundamentally divergent and perhaps irreconcilable objectives of Washington and Beijing mean that any deal will be temporary at most and partial at best.

Competition in multiple critical sectors, antithetical political systems, and changed political dynamics suggest that competition is likely to get sharper, broader, and deeper. In Washington, there is an increasing, and bipartisan, concern over China’s unfair trading practices, military buildup, and abysmal human rights record. All of these pose a direct challenge to America’s core national interests. Meanwhile, although there is an emerging American—and increasingly international—consensus on the challenges posed by China, there is not yet an agreement on the nature of the challenges, nor the appropriate response.

On the economic front, intellectual property theft, forced technology transfers, and massive industrial subsidies, along with China’s bid to outpace U.S. efforts in artificial intelligence, quantum computing, and robotics, threaten to undercut not just the country’s technological edge, but its prosperity and security. The aggressive use of the Chinese military and Chinese non-state actors against America and American allies threaten Washington’s traditional security partners. On human rights, the Chinese Communist Party’s oppression at home—seen most clearly in the forced detention, torture, and re-education of as many as 1-2 million Muslim Uighurs in internment camps in western China—and the export of its surveillance systems abroad are not only an affront to American sensibilities, but to human dignity. This is in addition to Beijing’s attempts to interfere, shape, and silence public debate in the United States and among its allies, which strike at the heart of the principles of democratic society.

There is now a bipartisan chorus in the United States calling for a fundamental restructuring of the U.S.-China relationship, even if there is not yet agreement on how best to do so. Unhelpfully, conversations continue to run in separate channels. The business, labor, financial, civil society, technological, diplomatic, and security communities might now share concerns about China, but they have divergent objectives, differing points of pressure, and varying pain thresholds.

While a potential trade deal would be a start towards recalibrating the relationship, a much broader strategic reset is also necessary. But a new strategy towards China will not take shape until Washington can address questions beyond economics and trade. Political leaders must better explain why America is competing with China, in which domains, with what resources, and for how long the country is willing to sustain such a competition. Competition can be used as a spur to shore up American strengths. But doing so will take sustained popular support that will only come when the public understands the stakes.