A long five months after Joe Biden took his oath of office, the administration finally initiated high-level trade talks with China. The brief news release from the Office of the U.S. Trade Representative revealed few details of the virtual meeting between Catharine Tsai and China’s Vice Premier Liu He, but it did reference the importance of trade relations between the two countries and signaled Tsai’s interest in further discussions with her Chinese counterpart.
Absent from the readout was any condescending or derogatory language about China — “forced transfer of technology” or “theft of intellectual property” — that was the hallmark of such releases in the Trump era. To many within and outside China, trade appeared to be an oasis in the desert of tense U.S.-China relations.
The restraint the Biden administration exercised reflects its pragmatic approach. With competing interests in various departments, the Biden administration has yet to complete its comprehensive review of the U.S.-China trade relationship. Apparently, maintaining the status quo presented itself as an attractive option, if only to buy time to complete the development of an overall strategy.
Equally important, the Biden administration did not want trade issues between China and the U.S. to interrupt the ongoing economic recovery. America registered 5 percent inflation in May, the highest since 2008. To keep inflation at bay, the U.S. needed to export more to China while continuing to get low-priced goods in return. To ruffle China’s feathers at this particular point in time was not sensible. It would likely cause new economic instability with the potential to derail the Biden administration’s domestic programs.
Will the trade truce hold for a considerable period of time, or will trade peace be achieved?
The Biden administration is expected to work out its China trade policy before the year is out. Moreover, the Phase 1 trade deal between the two countries is due to expire on Dec. 31. A successor deal is needed if the U.S. wants China to continue its purchases beyond this year. Although it is still reviewing its stance toward China, the U.S. trade policy orientation can now be sketched in broad outlines. Later this year, the Biden administration can be expected to act more decisively and aggressively.
An important aspect of Biden’s China trade policy concerns how he will handle the tariffs that his predecessor slapped on Chinese imports. Currently, some $360 billion worth of annual imports from China are subject to the punitive levies — measures that have so far failed to achieve the Trump administration’s stated objective. The U.S. trade deficit with China widened to $132.4 billion in the first five months of this year, a 44.8 percent increase year-on-year.
Further, this has in effect worked as a tax on U.S. consumers and manufacturers, since they have borne the brunt of the additional costs. Aware of the complaints, Biden took issue with Trump’s approach on the campaign trail, which raised hopes that the tariffs on Chinese imports would be scrapped soon after he took office. In the end, however, he decided to keep them in place, viewing them as a useful trade tool. The ditching of the existing tariffs depends, according to Tsai, on their effectiveness and on negotiations with China. She also indicated that the U.S. desired to use Trump’s legacy as a bargaining chip to secure a “structural change” in China’s economic system.
But the intent to capitalize on the tariffs will likely prove highly fraught. Their potency has all but disappeared, a fact substantiated by China’s 49.8 percent increase in exports to the U.S. in the first months of 2021. In fact, the tariffs are increasingly becoming a hot potato and unsustainable for the Biden administration. Apart from their unpopularity at home, an expert panel of the World Trade Organization ruled in September that the U.S., by imposing punitive levies on Chinese imports, had contravened global trade rules. Clinging to the Trump legacy illustrates America’s continued blatant disregard for WTO’s rules, which will only do further damage to U.S. credibility. The U.S. will have no hope of being regarded as a credible force for multilateralism by the international community as long as these tariffs are kept in place. Consequently, Biden’s ambitions to lead the international trade body will continue to elude him.
For these reasons, the U.S. administration does not seem as keen as its predecessor to use tariffs as a weapon against China. Nevertheless, it may still want to keep some of the existing tariffs. If it does, it would be expected to have a clear focus, targeting China’s high-tech sector and products it believes are related to the Chinese military, rather than the universal coverage approach that Trump took.
Further, the U.S. may even deem it necessary to impose or reimpose tariffs on some Chinese products it considers critical to its own national security or supply chains. The U.S. Department of Commerce is reportedly evaluating whether to initiate a Section 232 investigation into the national security impact of imports of magnetic neodymium, a key rare-earth element used in computer hard drives and electric motors.
In a sharp policy shift from the Trump administration, Biden is expected to prioritize the rewriting of global trade rules, not tariffs. He sees a large-scale revamp of WTO regulations — more than anything else — as fundamental to changing China’s economic behavior. He vowed to set “rules of the road” on trade, focusing on ensuring that “market democracies, not China or anyone else, write the 21st century rules around trade and technology.” Together with the European Union and Japan, the U.S. has developed detailed new rules on state-owned enterprises, industrial subsidies and “special and differential treatment” for developing countries. These rules have been written with an eye on China, although no reference was made to it. Some Chinese experts believe that the Biden administration will be out in full force to get them adopted by the WTO. While intending to use “all available tools” to fight China’s “unfair” trade practices, the White House will place the writing of new trade rules at the forefront of its trade policy toward China, setting off an intense confrontation.
Another trade policy thrust of the Biden administration is the revival of its talks with Taiwan regarding a trade and investment agreement, which was suspended by the Trump administration. Tsai held a virtual meeting with Taiwan authorities in early June, stressing the importance of U.S.-Taiwan trade and investment relationships. Subsequently, a trade and investment framework agreement meeting between the two parties was held.
So far, not a single country in the world that has diplomatic relations with China has entered into a trade pact with Taiwan. In all likelihood, however, the Biden administration will go ahead with the talks, which are aimed at concluding such an agreement. Apart from geopolitical considerations, it seeks to leverage its love affair with Taiwan to extract concessions from Beijing in its trade talks.
Soon after China and the U.S. concluded the Phase I trade deal in January 2020, I wrote in a piece for China-U.S. Focus noting that the road to trade peace between the two countries was treacherous. Unfortunately, I have to make the same prediction this time around. Because of the Biden administration’s geopolitical objectives, the current relative calm on the trade front does not seem to portend glorious days, but thunderstorms. As a result, the trade war is not on its way out. Rather, it will probably reemerge in a different form.