After stormy campaign rhetoric demonizing Chinese economic practices, the first months of the Trump administration seemed to indicate a more cautious and positive attitude towards the world's most important bilateral trading relationship. Such optimism is now gradually evaporating. Recent developments reflect a considerably harsher attitude by the Trump administration, portending trade actions that could destabilize U.S.-China economic relations.
So far, both the Chinese and American sides have shown restraint. But the structural political and economic conditions in both the United States and China are not promising. They leave only two major pathways open: a continuation of relatively minor actions on both sides that nonetheless could spiral into a tit-for-tat trade war that no one wanted; or then a concerted effort on both sides to engage in negotiations, ideally with one of their aims being the signing of a U.S.-China Bilateral Investment Treaty.
In the United States, President Trump is clearly fond of rattling the trade sabers to pander to his base. This does not mean that there are no major issues confronting trade between the United States and China. Throughout successive administrations a frigid trade war with China unfolded, but it played out mostly within the confines of the multilateral framework of the World Trade Organization (WTO). The Trump administration has now begun using older trade laws on U.S. books to target China, such as the Section 301 investigation of the Trade Act of 1974 to determine whether the Chinese government's industrial policies related to technology transfers, intellectual property, and innovation harm U.S. businesses.
Already the United States has slapped a 30 percent tariff on solar panel imports, a move directly aimed at China's large solar panel manufacturers. In addition, the Trump administration is considering import restrictions for steel and aluminum, again in part aimed at China. Finally, the U.S. Congress has reportedly put pressure on AT&T and Verizon to drop plans to sell smart phones made by China's Huawei in the United States, while regulators blocked the sale of U.S. money-transfer company MoneyGram to an affiliate of China's Alibaba.
In return, China has asked the WTO to review the solar panel tariffs, while announcing its own investigation into sorghum imports from the United States. China clearly will not stand by idly as the United States escalates various trade investigations and other actions. William Zarit, chairman of the American Chamber of Commerce in China, told The New York Times in January 2018 that he expects China to retaliate against any U.S. trade sanctions.
The biggest trigger for a trade war could result from the aforementioned Section 301 investigation into Chinese intellectual property practices. Now expected any day, President Trump himself has foreshadowed drastic action after the investigation is completed, warning of potentially “big damages” against China. “We're talking about numbers that you haven't even thought about,” Trump reportedly said in an interview with Reuters.
China's own gradual escalation of trade actions against the United States can be seen as a warning shot across Washington's bow. Besides promising to ask the WTO to review U.S. trade sanctions based on laws predating the WTO's founding and thus potentially outside of its rules, Chinese actions are targeting politically important sectors in the United States, such as agriculture.
China's investigation into U.S. sorghum imports is directed at farmers in Kansas and Texas. And just over the past several days, news reports indicate that some Chinese buyers canceled corn purchases from the United States and switched to rival supplier Ukraine. This comes as Beijing tightens controls on processing genetically modified strains of the crop. Since U.S. corn is mostly genetically modified, this could mark another front in trade tensions brewing between China and the United States. Corn is naturally a much larger export than sorghum for American farmers, who are also facing a bumper crop in corn this year that could make exports to China a vital source of additional demand.
This illustrates that, as the Trump administration, the Chinese government cannot be seen as taking no action in the face of tougher U.S. trade sanctions. National prestige, but, perhaps more importantly, the desire to forestall a form of moral hazard are at work: China does not want the Trump administration to think it can get away with bullying China – tough actions on the U.S. side will be met with tough and politically directed actions on the Chinese. The structural political and economic conditions on both sides of the Pacific thus point to a slow, but ultimately highly dangerous escalation of tit-for-tat trade sanctions.
Both Beijing and Washington should thus seriously ponder the only available alternate route: stepped up negations with an ambitious end goal. This goal could encompass the stalled completion of a Bilateral Investment Treaty, but perhaps they should go beyond this to address all major outstanding issues, including Chinese regulations on intellectual property rights and innovation policy, as well as various restraints on bilateral market access. In this manner, the Trump administration could use the specter of trade penalties to pressure China into reforming some of its policies.
According to Chinese government sources, China and the United States have agreed to resume their high-level economic dialogue after these talks were suspended last year by the Trump administration. This news came as Chinese State Councillor Yang Jiechi met U.S. Secretary of State Rex Tillerson during a visit to Washington, DC on February 8, 2018.
Such a resumption of the comprehensive economic dialogue would provide a welcome breath of hope. It would allow both sides to keep cooler heads and begin tackling imbalances in the bilateral commercial relationship. Certainly, the Chinese government seems increasingly concerned and has thus sent one of its most seasoned diplomats and U.S. experts to Washington. However, even now it is not clear whether the dialogue will actually resume, and even less so whether it can begin to solve the larger problems bedeviling the U.S.-China economic relationship.
The biggest present danger is that the Trump administration does not have a clear final objective in mind to rebalance China-U.S. commercial relations. If it wants to change Chinese policies, it should make clear what changes it would like to see and put this desire into a framework for negotiations. Right now, the approach taken by the Trump administration seems one of firing scattered shots, none of which is especially lethal, but, if combined with Chinese retaliation, could result in a tit-for-tat trade war. A wiser approach would be to carry the big stick of potential trade sanctions, but at the same time state an openness to dialogue that is set within clearly defined parameters sketching desired negotiating outcomes on both sides.
