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Economy

Why No Agreement in China-US Trade Negotiations?

May 29 , 2019
  • Wu Zurong

    Research Fellow, China Foundation for Int'l Studies

Amid continued optimistic updates on the progress made in the year-long China-US trade negotiations released at the end of each round of talks, it came as a big surprise to the whole world that President Donald Trump decided to increase tariffs on $200 billion worth of Chinese exports to the US from 10 percent to 25 percent — and further that no agreement had been reached between China and the US after year-long negotiations with the 11th round concluded in Washington, DC on May 10. With observers of Sino-US relations around the world speculating about the potential causes that produced this setback, the following are of primary importance:

First, the US has pursued the wrong goal in the trade talks. Trump repeatedly said in public during the past year that the US is winning the negotiations, implying that the US always wins and this time will also triumph over China when negotiations are concluded.

It is known to all that the China-US trade negotiations are aimed at resolving the differences between the two countries on issues such as restrictions on Chinese imports from the US and on Chinese investments in the US, as well as the trade deficit in commodities, along with protection of intellectual property rights and market access. These talks would also address concerns related to trade and two-way investment raised by both sides. These negotiations are not a one-way street: there is no winner or loser resulting from negotiations based on equality and mutual respect with the principle of mutual understanding and mutual accommodation. The negotiated agreement should stand for mutually benefit and win-win results. If an agreement is happily accepted by both sides, it would not only help resolve or reduce existing differences, but also pave the way for further development of trade and two-way investment between the two countries in the future. It is unwise for either side to expect the other side to blink or be defeated, as China and the US, the world’s two largest economies, are both formidable contenders.

Second, negotiations are not aimed at overturning the existing China-US economic and trade relationship or imposing new restrictions on one side. Trump has made a fundamental mistake in assessing the trade and economic relationship over the past 47 years from Nixon to Obama. By emphasizing America’s $300 billion or so trade deficit in commodities in 2018, he believes that the US has been unfairly treated for decades and lost about $300 billion or $600 billion to China annually. He puts the blame on previous administrations for the unfair situation and is determined to overturn the past model they created, by fundamentally changing the China-US trade and economic relationship.

As is widely known, in the 7 years from 1971 to 1978, bilateral trade grew from zero to $0.991 billion or $1.18 billion (according to US figures), and in 2018 bilateral trade reached $633.52 billion. The US began to invest in China ever since Nixon’s historic visit to China, while China didn’t make large investments in the US until recent years. Now two-way accumulated investment has reached some $240 billion. The rapid development of China-US trade and economic relations has brought enormous real benefits to the people of both countries and the world. Due to the different stages of the two countries’ economic development, and the great economic changes in the world created by market forces and globalization, some problems are natural, such as trade surplus or deficit, and the irrational layout of world industries and supply chains. They are not the direct results of the policies of any country. It is fair to say that all the previous US administrations have contributed greatly to the development of China-US trade and economic relations. It could only create controversy and trouble for the Trump administration to try to make fundamental changes in the China-US trade and economic relationship. As the changes Trump intends to make are based on an erroneous assessment, they could not be brought about by imposing high tariffs on all Chinese exports and by his art of putting extreme pressure on his negotiating partner. Economic data has shown that the tariffs are becoming new obstacles to bilateral trade that harm the interests of both countries and the world.

Third, the US has underestimated the complementary and closely-intertwined nature of the two countries’ economies. It is totally wrong to believe that the US economy would witness high growth if the US continues to hit the Chinese economy hard until it collapses. This zero-sum game logic has been mercilessly repudiated by recent developments as a result of the US unfriendly actions towards Chinese exports and investments in the US. When China’s economy is injured, the US economy suffers damage soon afterwards. The tariffs create difficulties for Chinese exports and make some Chinese companies look for other markets or change their products. At the same time, US companies have been telling the truth: they find it difficult to import alternatives from other countries to replace the cheap but high-quality commodities that come from China, and they are unable to make these products — such as popular toys, apparel, shoes, electronic components and others — that come from China, due to the lack of essential facilities and cheap labor in the US. As US importers have to pay more, retailer giants like Walmart and Macy’s have indicated they will need to raise prices, and consumers will have to pay more. US politicians are divorced from the reality that manufacturing those low-value-added products are jobs that have for quite a few years migrated to relatively less-developed, more labor-intensive regions. China-made daily necessities have been offering a unique complement to the US economy and have been helping the American people in many ways.

Another example is America’s unreasonable administrative restrictions on Huawei, a Chinese telecommunications equipment maker and smartphone provider. The US decided on May 15, 2019 to impose an export ban, which is to enter into force in 90 days, barring US companies from selling components and software to Huawei. This US ban is widely viewed as intended to hold Huawei down. While it remains to be seen whether or not US actions could lead to Huawei’s collapse or decline, it is clear that US telecommunications companies will be restricted from the Chinese market due to the actions of their own government. More than $11 billion losses for US telecommunications companies are inevitable. Some observers have worried that America’s unfriendly actions would have unintended serious consequences for rural areas in southern states like Louisiana, Alabama and Mississippi. As Huawei sells cheap equipment to many small, rural phone and internet service providers, telecommunications companies in rural areas could face increased costs or network disruptions if they are unable to buy the gear they need from Chinese suppliers.     

It is believed that as time goes on, with US tariffs levied on all Chinese exports and new restrictions on Chinese investments imposed for the sake of avoiding so-called national security risks, more losses will pile onto US companies and consumers. The global economy would suffer more uncertainties with a slow-down unavoidable.   

Fourth, the US treated China not as a partner, but as a strategic competitor or rival in the negotiations. China and the US are close partners as they have over $600 billion in trade and some $240 billion in two-way investment, though there is of course a certain degree of market competition over some specific business deals. China has always insisted on keeping its word and seeing its actions through to the end when dealing with trade and investment between the two countries. The business climate in China has constantly improved, and remarkable progress has been made in the protection of intellectual property rights. What’s more, China has never done anything to harm bilateral trade and investment. However, the US has been groundlessly accusing China of stealing US intellectual property and of making forced technology transfer, with the purpose of pressuring China into making concessions and changing its trade practices. The US has gone so far as to use these fabricated crimes as evidence to unilaterally impose tariffs on Chinese exports to the US, and to try to keep those tariffs intact even when a trade agreement has been signed. The US has tried hard to bully China into buying all the things it wishes to sell even when China doesn’t need them. It has tried to bully China into accepting a more favorable trade agreement with the US, by which the US could punish China whenever it deems necessary. In brief, it seems the US sees China as weak and defeated in battle, easily pressured into accepting an unequal agreement using overwhelming American superiority. But the US would find such a mission never accomplished.

Now the China-US trade negotiations have reached an impasse. The ball is in America’s court. The US has to refrain from going too far in containing China by making exorbitant demands as leverage to pressure China into making unrealistic concessions. Only when the US sincerely treats China as an equal business partner in the talks, and conducts negotiation in accordance with established international norms, can a mutually beneficial and win-win trade agreement be produced with the joint efforts of the two countries. 

 

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