‘Phase one’ China trade deal tests the limits of US power

U.S. President Donald Trump (RIGHT) and Chinese Vice Premier Liu He (LEFT), who is also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, sign the China-U.S. phase-one economic and trade agreement during a ceremony at the East Room of the White House in Washington D.C., the United States, 15 January 2020 (Photo:Reuters).

Author: Geoffrey Gertz, Brookings Institution

Throughout his campaign and the early years of his presidency, Donald Trump promised to fundamentally reshape US–China trade policy. The conclusion of the ‘phase one’ trade deal, agreed to by the two countries in mid-January, provides an opportunity to assess what has been achieved so far.

Trump’s efforts to change China’s behaviour are running up against the same limits faced by previous US administrations. Yet there is little evidence of a long-term strategy that reflects this reality.

In the two decades leading up to Trump’s election, US presidents followed a broadly similar, largely bipartisan approach to engagement with China. The United States welcomed economic integration between the two countries, believing it would produce real economic gains for the United States and ultimately encourage China to move towards a more market-based economy.

Where Chinese actions fell short of US aspirations, the United States had two main levers to shift Chinese behaviour. First, bilateral diplomatic appeals such as the various iterations of the Strategic and Economic Dialogue, and second, filing claims against China at the World Trade Organization (WTO), infrequently at first but more actively over time.

By the time of the 2016 election, this approach was showing shortcomings. While the policy of engagement had produced meaningful benefits for US consumers and some corporations, US workers had not always shared in these gains. Moreover, the policy levers the US government relied upon to shift Chinese behaviour were of limited use. US exhortations that market-based policies were actually in China’s own best interest were unconvincing and US diplomats had limited means to otherwise pressure or negotiate China into changing its approach.

Though China would often eventually comply with WTO rulings against it, pursuing Chinese distortions through the parameters of international trade law always seemed like a game of whack-a-mole. China could agree to eliminate one specific trade barrier or subsidy. But so long as the country’s broader economic model relied on deep-rooted industrial policy and a long-term strategy of import substitution in ever more sophisticated products, pursuing trade remedies one narrow barrier at a time was fruitless.

For these reasons, Trump’s promise to overhaul China policy found a receptive audience throughout the halls of power in Washington. The need to rethink China policy — if not the specifics of tariffs and trade war — is arguably the Trump election promise with the strongest support among policymakers from both parties.

But the desire to ‘get tough’ on China is no substitute for an actual strategy. From the beginning, Trump’s China policy has been hamstrung by a failure to resolve a fundamental tension. Does ‘getting tough’ mean pressuring China into liberalising its economy and thereby further increasing US–China economic interdependence? This would be a shift in tactics from previous US approaches toward China, but not of ultimate objective.

Or does ‘getting tough’ mean seeking to decouple at least some aspects of the deep integration between the US and Chinese economies? The Trump administration has sent contradictory messages, at times insisting US companies get better access to the Chinese market, and at other times ordering US companies to leave China. Trump settled on tariffs, but didn’t appear to have a clear strategy explaining why.

The phase one trade deal hasn’t helped clear up this confusion. The centrepiece of the deal is a pledge that China will buy some US$200 billion in US goods and services. In return, the United States will suspend some of the new tariffs Trump previously announced. But this appeal to managed trade will ultimately increase Chinese leverage over the United States. So long as US exports rely on the indulgences of Chinese politicians, the latent threat that China will pull the plug on this system will continue to hang over US–China trade relations.

Most importantly, the deal does not achieve any of the difficult structural reforms US policymakers have been seeking around industrial policy, the ‘Made in China 2025’ program and broader state influence in the economy. Earlier experiences suggested neither US diplomatic appeals nor WTO trade restrictions would sway China into giving up these core aspects of its economic model. The lesson of the phase one deal is that aggressive tariffs won’t either.

The Trump administration continues to insist these thorny issues will…

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