Analysis: New US-China Trade Deal Leaves the Thorniest Problems Unresolved

January 16, 2020by Don Lee and Noah Bierman, Los Angeles Times (TNS)
U.S. President Donald Trump (L) greets Vice President Mike Pence, Treasury Secretary Steve Mnuchin and Trade Representative Robert Lighthizer before signing an initial trade deal at the White House in Washington on January 15, 2020. (Yuri Gripas/Abaca Press/TNS)

WASHINGTON — After nearly two years of a bruising trade war, President Donald Trump signed a trade deal with China on Wednesday that provides the president with political bragging rights but allows both sides to put off the most difficult disputes until after the November election.

Despite the ceremonial pomp of a White House signing event and Trump’s extravagant tweets on his achievement, the hard reality of the so-called Phase 1 agreement is that it only begins to address the potentially dangerous gulf between the United States and China on trade and economic policy.

Speaking in the East Room beside Chinese Vice Premier Liu He, Trump hailed the long-sought agreement as a “momentous step” that was “righting the wrongs of the past.”

Trump described the roller-coaster negotiations, including punishing tit-for-tat tariffs, as “tough, honest, open and respectful,” and said he would visit China “in the not too distant future.”

Although the signing signified a cease-fire in the trade war, the two nations remain on the cusp of long-term decisions that will have potentially harsh consequences for both Washington and Beijing.

The United States already has moved to restrict Chinese investments in America, deny licenses for Chinese telecom firms and blacklist others, notably Huawei. Research collaborations are coming under scrutiny and more Chinese international students are being denied visas.

“That means that the fundamental tensions between the U.S. and China will not subside, even if the administration has achieved some incremental progress as well as met certain political goals that could calm the relationship for the short-term,” said Claire Reade. Reade served as the first chief counsel for China trade enforcement at the Office of the U.S. Trade Representative.

Over time, the relationship between the world’s two economic superpowers seems all but certain to go in one of two directions.

In the best-case scenario, both governments would pull back from confrontation, expanding — not curbing — their mutual dependency on trade, and at least ameliorating some of Washington’s most serious grievances.

Those include industrial espionage and Beijing’s heavy subsidies for its many state-owned enterprises that most economists say undercut foreign rivals and distort global markets.

Turning toward a strategy of compromise and short-term sacrifice instead of confrontation would be difficult for both sides under the best of circumstances, and especially so for the Chinese Communist Party and its elites, who are deeply invested in the status quo.

But the alternative represents a darker and even more hazardous road ahead.

If the hard-line, nationalistic turn in both countries continues, as seems highly possible in view of a rising tendency among Americans to see China as an adversary, the result could be a new cold war.

That would potentially lead to a more isolated and embattled Beijing, with reduced access to Western markets that now support a Chinese economy still dependent on trade and foreign technology.

Eventually, China might be able to shift more assuredly to domestic consumption and homegrown innovation. But the transition, even if ultimately successful, would put enormous political pressure on a regime already becoming more and more authoritarian.

The so-called Phase 1 agreement being signed Wednesday includes pledges by China to boost U.S. exports by about $200 billion over two years, including farm goods, energy and manufactured products. Whether China can meet these commitments — they may run afoul of World Trade Organization rules and strain relations with other trading partners — the increased purchases will nonetheless be welcomed by important Trump constituents in rural America and on Wall Street.

Robert Lighthizer, Trump’s top trade official, has said the 86-page agreement also includes Chinese commitments on intellectual property, financial services and technology transfer. Analysts, however, said there was little to indicate that China had gone beyond plans already in place and that the real question was whether Beijing would carry them out in meaningful ways.

Beijing, for its part, is getting a small rollback of tariffs. And as a goodwill gesture, Washington withdrew its designation of China as a currency manipulator, although the label had little basis or practical significance.

The two sides also are expected to restart the kind of broad economic dialogue that was begun by President George W. Bush in 2006.

For much of the last four decades since China’s historic economic opening, the U.S. approach had been mostly to engage and try to cooperate with Beijing, in part to encourage it to adopt a more liberal, rules-based economic system.

But the last few years have seen President Xi Jinping elevating the Chinese Communist Party to a degree not seen since Mao Zedong and tightening its grip in all facets of Chinese society.

That has hardened attitudes in the United States toward China and fueled skepticism that Beijing will ever give up its industrial policies, even if they aren’t efficient and will invariably bring conflicts with the United States.

The practical outflow of Xi’s adoption of Maoist ideology is China’s doubling down on state-owned enterprises and the party’s top-down intervention in the economy to build global influence and leadership in critical sectors such as robotics, aerospace and artificial intelligence.

“Xi Jinping made clear that their system is working very well and that they’re not going to try to make their society or their economic system look like Western capitalism,” said Hank Paulson, former Treasury secretary in the Bush administration. He founded the Paulson Institute in 2011 to focus on U.S.-China issues and has been in regular contact with senior Chinese officials.

“This is not the China we would like to have, but it is the China we got,” Paulson said in an interview. “We are stuck with each other, and both sides have got to figure out a path forward which preserves global peace, stability and sustained economic growth in a rules-based system.”

The decisions that shape the future are by no means entirely centered in Washington.

“Xi Jinping faces the trade-off between: Does he want control, or is he so concerned about prospects for economic growth that he takes a more hands-off approach?” said David Bachman, a China expert at the University of Washington in Seattle. At the moment, he said, there’s nothing to indicate that Xi is backing away.

Up to now, Trump’s approach to China has been a hodgepodge of disparate and sometimes conflicting policies on trade, technology and national security, reflecting differences within the administration between China hardliners and those advocating a more cooperative tack in dealing with China.

Trump has been consistent in demanding more Chinese purchases of U.S. goods and reducing the large American trade deficit, and he has had modest success. Less clear are his convictions and resolve in taking on China to make fundamental changes to its economic system.

“My take on Phase 1 is that it largely restores the status quo,” said Scott Paul, president of the Alliance for American Manufacturing, a labor-industry proponent for fair trade. “I’m not optimistic that we’ll get a Phase 2 deal that’s going to dramatically alter the landscape.

“And in that way,” he said, Trump “will have adopted the pattern of past administrations where they just kick the can down the road on these very tough issues.”

The one difference, Paul noted, is that Trump has made extensive use of tariffs and has kept most of them in place as leverage for future talks. That could push more U.S. multinationals with operations in China to look for new places for production and supplies, mostly in other parts of Asia.

At the same time, Trump’s tariffs and Chinese retaliatory duties on American goods have not only squeezed farmers, but also caused a shrinking of business spending in the United States and volatility in stock markets.

“It’s going to take an all-out strategy from the administration,” said Paul, and Trump may not want to do anything to risk disrupting financial markets and the broader economy ahead of the November election.

Analysts of all stripes agree that the United States would do well to partner with Europe and Japan in pressuring China to make structural reforms, but Trump has by and large pursued trade actions unilaterally. And he has alienated once-stalwart allies by slapping tariffs on them as well, and lashing them with harsh rhetoric over their trade practices.

“When we talk about decoupling or an economic iron curtain, I will tell you, I don’t find any other countries that are looking to decouple from China’s economy,” Paulson said. “We need a new framework that recognizes today’s realities, and we need to enlist our allies — which are a huge strategic advantage.”

Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington-based think tank that has been sharply critical of China’s mercantilist behavior, said European officials had essentially told him: “Why would we work with the Trump administration when they want to put tariffs on our cars?”

Atkinson and other analysts doubt they’ll see anything substantive beyond the first-stage deal.

“This may be as far as we’re going to go,” said Bachman, of the University of Washington. “I think (Phase 1) was really an attempt to put the China dispute on the back burner until after the election, with expectation that the Chinese will step up their agricultural purchases significantly and that the Trump campaign can claim that farmers got a good deal.”

As for the future of the U.S.-China relationship, he said: “We’re going to be sort of stuck in between some cooperation-competition rivalry on the one hand, and then out-and-out cold war on the other.

“How we describe that and what that means in real practice is just going to have to be something we work out,” he predicted.


©2020 Los Angeles Times

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