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Economy

Abandon Aggression while Protecting Interests: US-China Economic Diplomacy Going Forward

Aug 07 , 2020
  • Sara Hsu

    Visiting Scholar at Fudan University

US-China diplomatic relations are at a forty-year low, and there is little to no agreement between the two governments, economic or otherwise. The US-China trade war itself has resulted in losses of tens of billions of dollars for both the US and China. Economic diplomacy must be improved in order to raise the welfare of citizens in both countries. How should the US go about promoting that?

I propose a five-step plan that focuses on reducing tensions and rebuilding trust.

The first step is disengagement from the trade war. This means ending the tariffs imposed from the outset of the trade war and revoking the requirements under the Phase I trade deal forcing China to purchase an additional $200 billion of US goods and services. Reducing the US-China trade deficit never made economic sense, and economists of all stripes have opposed implementing tariffs, especially on the grounds of changing the trade balance. In addition, asking China to double or triple their imports from the US in a short period of two years is not only unfair (and perhaps impossible), but it flies in the face of the very market principles which the US itself has accused China of violating.

The forced technology transfer agreement under the Phase I trade deal should be reinforced and upheld. Furthermore, in exchange for ending the trade war, China should agree to revisit the issue of IP theft – the other reason for the trade war as discussed in the U.S. Trade Representative’s March 2018 Section 301 report (the other being forced technology transfer). Government-led IP cybertheft remains an issue; only recently, two Chinese hackers working with the Ministry of State Security were charged with stealing intellectual property and confidential business information. In the case of hacking, high-level diplomacy is necessary to end this process. This was effective under the Obama administration, when President Obama asked President Xi Jinping to end hacking of intellectual property. In addition, US firms and government entities must step up their security measures. A report by the Government Accountability Office stated that the August 2018 Federal Cybersecurity Risk Assessment and Action Plan found that 71 of 96 civilian agencies had cybersecurity programs were either at risk or at high risk. A 2017 survey by Chicago-based insurance company Hiscox found that 73% of companies were not prepared for hackers.

The second step is to remove China’s designation as a currency manipulator. The Trump administration labeled China a currency manipulator in August 2019, after China’s central bank allowed the currency to weaken. Many economists agreed that China’s actions were actually in line with market forces moving against China’s economy, contrary to Trump’s allegation. In fact, in recent years, China has intervened in currency market to support the value of its currency.

The third step is to reinstate the special trade status of Hong Kong with the US. The revocation of this status worked against US aims to directly punish mainland China, instead primarily harming Hong Kong. While there will certainly be impacts felt by both Chinese firms and American multinationals due to an increase in tariffs, Hong Kong firms will suffer the most. While it may make sense to revoke license exceptions on sensitive exports to Hong Kong as long as IP issues remain a point of contention between the US and China, raising tariffs only harms trade participants.

The fourth step is to reinvigorate the U.S.-China Comprehensive Economic Dialogues – the semi-annual talks that have traditionally been used to resolve disputes. While the Trump administration first abandoned the talks and later restarted, abandoned, and again restarted them, the talks have not taken place regularly since being overshadowed by the trade war and rising tensions between the two countries. These talks are essential to overcoming major issues between the two countries and building up economic diplomacy, if for no other reason than they demonstrate a commitment to cooperation between the two nations.

The fifth step is for the two nations to work together, along with other countries, to reframe global governance institutions in what is a new world order. Cooperation within the World Trade Organization must be restored, with potential reshuffling of what is deemed fair practice. Questions about raising standards for labor, environment, and market forces should be considered. Discussions within the UN should be improved so that both the US and China will be better prepared for global crises like the coronavirus and more aligned in working on global security issues.

The United States has noticeably said nothing about banning high-tech Chinese companies from doing business in the US. US security remains a key concern, and opening the door to Chinese firms in US telecom and digital networks can allow the Chinese government to interfere in economically and physically critical infrastructure. Maintaining domestic security is essential to promoting peace and security; therefore, it makes sense to continue to carefully review Chinese high-tech firms that wish to enter the US market.

Furthermore, I hail the process of American firms moving out of China and diversifying into other countries, particularly those closer to home. As we have seen during the coronavirus crisis, supply chains that cross long distances can pose issues when transportation is stalled. American firms should reassess risks associate with external shocks like pandemics, as well as shocks, such as political complications, located within their country of operation.

The central takeaways from this are that the US should abandon its policies of aggression where US interests are harmed and little to nothing of value is gained, vigorously strengthen diplomatic relations with China to demonstrate good will and make strides where possible, and reduce exposure to China where there are security concerns or rising risks. Hence, a more nuanced approach to US-China economy diplomacy will greatly benefit both countries. The risk of inaction is high as tensions only continue to simmer between the two countries.

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