A year has passed since the beginning of the tit-for-tat trade war between China and the United States that has shaken up the global economy. In search of a trade deal, U.S. and Chinese negotiators have had eleven rounds of trade talks in 2019 alone. But negotiations collapsed in May, with each side blaming the other for the impasse. President Donald Trump and President Xi Jinping’s truce on the sidelines of the Group of 20 Summit in Osaka on June 28 was welcome news that has paved the way for the resumption of talks. But we saw a similar presidential handshake for a trade war cease-fire at the previous G20 meeting in Buenos Aires last December, and that cease-fire did not last. The world’s two great economic powers on either side of the Pacific still remain as far apart as they were one year ago.
A balanced trade sheet or something more?
Whether or not Trump and Xi will end the trade war is the “$250 Billion Dollar Question” (if we use Trump’s tariff estimate). If the trade war is primarily about getting China to purchase more American goods and services and adjust the countries’ trade imbalance, we may see some success. A key step came at the Osaka meeting, where Trump agreed to allow U.S. firms to start supplying Chinese technology giant Huawei again, and suspended tariffs on $300 billions of Chinese goods. In return, Beijing promised to purchase more American agricultural products and promote greater market openness.
For some involved in U.S.-China relations, however, the trade war is about more than balancing a trade sheet. Policymakers in Washington want to use the trade war to pressure China to deal with structural issues regarding how the Beijing manages the country’s economy and to level the playing field for foreign investment. In March, China fast-tracked the approval of its first foreign investment law that made the country’s investment climate more equitable for foreign investors and banned forced technology transfers. While this was a promising development, the new trade regime does not provide for adequate enforcement of either investment or technology transfer rules. The U.S. is still demanding more significant changes regarding intellectual property protections, forced technology transfers from U.S. companies, and the cybertheft of U.S. trade secrets.
A balanced text to the trade deal?
Hammering out the text of any agreement will require some finesse to balance the requirements of both sides, and the differences between the two countries’ legal systems and constitutions add an extra layer of complexity to the already challenging negotiation process. The Trump Administration is demanding that China codify changes in Chinese law rather than relying on an administrative decree from the State Council. The Chinese negotiating team, made up primarily by economists and led by Vice Premier Liu He, considers the U.S. insistence on Chinese legislative action to be an infringement of the country’s sovereignty. But the U.S. team, made up primarily of trade lawyers and led by U.S. Trade Representative Robert Lighthizer, saw China’s refusal to pass a law as evidence of a lack of commitment and sincerity. While the U.S. Congress has the power to shape and ratify any trade agreement negotiated by the president, the Chinese National People’s Congress acts as a rubber stamp for the Chinese president’s decision. Chinese laws are typically vaguer than U.S. laws. Thus, administrative actions and regulatory measures by the Chinese state can be more effective in enforcing trade agreements than laws are.
Differences in the political culture in both counties are also playing a role. The Chinese do not want to publicize the details of negotiations—which could give the impression to the Chinese domestic audience that the U.S. is dictating the terms of an agreement. But that is exactly what the U.S. negotiating team and President Trump want the American public to see. The remaining gaps between the two countries are harder to resolve because they reflect differing views on what is the ultimate game plan of the trade war and whether both sides can agree on a balanced and nuanced text to the trade deal that will save face on both sides.
Domestic political considerations
Domestic political considerations in both countries further complicate the picture. President Trump has staked his re-election on strong economic growth and has said trade wars are “good, and easy to win.” As he heads into a re-election campaign, he does not want to be seen as coming away with nothing after two years of bruising negotiations, which would allow Democrats to argue that his “tariff man” strategy was a failure. Republicans in Congress are also uneasy with the trade war, which has hurt businesses in their home states—especially states that will be important in the 2020 election, such as Wisconsin, Michigan, and Pennsylvania. President Trump will announce victory over China, regardless of the actual outcome, and a strong U.S. economy in 2020 would probably allow him to do so. President Xi may not be able to pursue this strategy, however, as China’s debt-laden economy is slowing and growth in industrial production has slackened. In addition, nationalism is still on the rise in China. Backing down from the trade war would be politically damaging for Xi, as it would go against the state media’s story line that China must stand up against centuries of humiliation it has endured at the hands of Western powers. In addition, Xi is not going to risk making concessions in a year that is the anniversary of so many iconic political moments in China, including the 70th anniversary of the establishment of People’s Republic of China and the 30th anniversary of the Tiananmen Square Protest.
Is continuing competition between the U.S. and China likely to be the “new normal” in the coming decade? Contrary to what President Trump claims, the trade war is not just about trade itself—it is also about the hegemonic rivalry between the two countries. During the presidency of Barack Obama, China-U.S. relations reflected the belief that a strong and thriving China is in the United States’ long-term national interest. This optimistic approach has given way to a more skeptical consensus in Washington about China’s rise. Even if the trade war is resolved in the immediate term, the underlying tensions emerging from U.S.-China competition for economic and technological dominance will likely continue. With China’s model of state capitalism and Trump’s unilateralism in conflict, we may need to brace ourselves for this new normal in the global economy.