Long-term economic competition is at the mercy of even longer-term geopolitical competition
Last Saturday in Buenos Aires, over grilled steak and Malbec one assumes were produced domestically, U.S. President Donald Trump and Chinese President Xi Jinping reached something of cease-fire in the trade war. Four days later, it’s unclear whether they agree on what they agreed to. The official statements they’ve issued subsequently clashed in scope, tone and substance. Not that the finer points will make much of a difference for the next few years. The U.S. and China are just beginning what will surely be a long, ugly process of economic disintegration that will disrupt both countries and, given their economic influence, alter the structure of the global economy.
But when the dust settles, each will still have ample interest in doing business with the other, making a narrower yet mutually beneficial long-term arrangement possible in the future. The only way that changes is if the broader strategic competition with China dramatically intensifies, in which case the U.S. will have every reason to weaponise trade.
The White House’s version of events is as follows: China pledged to buy a “very substantial” amount of U.S. agricultural, energy and industrial goods, with purchases of farm products beginning immediately. Beijing also agreed to negotiate immediately on Chinese practices such as forced technology transfers, intellectual property protection, nontariff barriers and cyber theft. In exchange, the U.S. promised to delay until March a planned 15% jump in the September round of 10% tariffs targeting some $200 bln in Chinese exports. (It wasn’t until Monday that Trump said China, home to the world’s largest auto market, would remove tariffs on U.S. auto exports, which increased to 40% in July.)
But Beijing has said nothing about the 90 day extension, nor about which goods it’s planning to buy, nor how it will buy them. (It has yet to confirm Trump’s announcement about auto exports; neither have Trump’s trade advisors, for that matter.) At no point did China even exhibit a willingness to talk about the trade practices that helped spark the trade war in the first place, at least not publicly. According to Beijing, the upcoming talks will focus on scrapping all tariffs imposed by both countries and on reaching a consensus on trade.
To be clear, the differences in the statements reflect the necessity of political salesmanship. But they also attest to the difficulties that confound a more permanent agreement: China can’t concede on the biggest issues at stake, and the U.S. isn’t under enough immediate economic or political pressure to back down. So regardless of what’s up for discussion, extending talks by a few months is won’t make these challenges any less difficult.
Why the U.S. Won’t Back Down
The difficulties lie not in the arithmetic of tariffs and trade but in the nature of the trade relationship itself. China’s trade surplus ($375 bln in goods) is certainly an issue – bringing it down was a centerpiece of Trump’s presidential campaign – but it isn’t the main issue. In many ways, it testifies to the power of U.S. consumers and the sophistication of the U.S. economy, and fixating on reducing the headline figure won’t bring back labor-intensive jobs lost to China. The U.S and China could have a mutually beneficial trade relationship and still run a hefty trade imbalance — so long as the U.S is able to compete with China on a level playing field. Currently, it’s not. What the U.S. needs is the ability to sell what the U.S. specialises in (high-end goods and services) in China’s rapidly growing market without facing informal tariffs or fearing, for example, loss of sensitive intellectual property to emerging Chinese competitors that have unlimited access to state lending. It means playing by the common set of rules China agreed to when it joined the World Trade Organisation in 2001, and abiding by WTO rulings to resolve complaints, just as the U.S. and its other trading partners do when disputes inevitably arise. Ad hoc, state-directed purchases of U.S. goods by China to dent the deficit won’t address these underlying structural issues.
Early on, Beijing thought it could buy its way out of the trade war by dramatically ramping up purchases of highdollar U.S. goods it needed anyway, such as oil and gas, and by implementing modest reforms on market access and foreign investment. (In May, Xi’s top economic adviser, Liu He, thought he had reached a temporary deal with U.S. Treasury Secretary Steven Mnuchin, who even declared the trade war “on hold,” only to see the deal quickly scuttled by more hawkish figures in the White House.) Beijing would happily buy however much stuff it would take to allow Trump to claim victory on the deficit. Doing so would certainly be cheaper and easier than trying to bail out all the Chinese exporters that were about to get slammed by the U.S. tariffs at an economically inopportune time.
Reinforcing Beijing’s strategy was the (correct) belief that tariffs would take a financial toll on the U.S. too. They would hurt U.S. consumers whose living standards had improved thanks to cheap Chinese goods, U.S.-based firms dependent on inputs made in China, and U.S.-owned exporters with factories in China. (This doesn’t even account for the pain caused to U.S. exporters by Chinese counter-tariffs.) Beijing assumed that with midterm elections around the corner, Trump would have little appetite for a mutually destructive trade war that would rattle markets and put the White House at odds with constituencies such as farmers and free-traders that traditionally vote Republican. And this, Beijing hoped, would discourage the U.S. from pushing for structural overhauls in Chinese trade practices.
Beijing’s strategy evidently fell short. The U.S. economy is humming along at the peak of the business cycle. The trade war has certainly hurt certain U.S. sectors, and there will be long-term costs to the U.S. economy if it loses access to China’s gigantic consumer market — especially if high-value exporting countries in Europe and Asia don’t face the same barriers. But the pain has been subtle enough, and trade policy esoteric enough, to prevent the trade war from becoming a major political issue. In fact, the congressional districts in which trade influenced voters’ decisions tended to be the those that have benefited from new tariffs, particularly on steel and aluminum. There weren’t very many of them, but they generally supported the trade war.
More problematic for Beijing is that something of a bipartisan consensus has formed in the U.S. that China has stopped making progress on its WTO commitments and that the onus is on the U.S. to stop China from enjoying the benefits of the global trade system without abiding by its rules. (This view isn’t exactly new; it was the main impetus behind the Trans-Pacific Partnership, from which Trump withdrew.) There’s also a growing consensus that Chinese practices such as forced technology transfers, outright technology theft, and its overt, state-backed “Made in China 2025? plan n to dominate high-tech industries are indeed a threat to U.S. interests and the “rules-based order” — even if there’s ample disagreement over whether punitive tariffs are an effective way to address them.
Add to this the suspicions surrounding Chinese geopolitical ambitions. For those who think Washington and Beijing are sliding inexorably toward a new Cold War, the