by Andrew Gilholm
For Chinese observers of US politics, 2017 largely confirmed their initial assessment of US President Donald Trump: a transactional deal-maker who would negotiate with bluster and brinkmanship, but who Beijing could ultimately manage with carefully calibrated carrot-and-stick tactics and a more coherent long-term strategy than the White House could muster. In 2018, tariffs on steel and other products in January and February did not shake this assessment. Escalating tariff threats in March caused more concern, but it was not until April, when US companies were banned from selling to ZTE, that many in China began to wonder if their Trump management formula might fail this time.
Beijing nonetheless stuck to their approach and by late May was (at least domestically) proclaiming its success after their delegation to Washington ended with a joint statement agreeing to suspend punitive measures including tariffs. Meanwhile, after months of growing criticism in Washington of Trump’s escalatory tariff plans, the President is now facing a backlash against his approach to de-escalation – specifically, the apparent deal that is emerging to lift the ZTE ban and prevent its commercial collapse. As this US-China rollercoaster ride continues, the turns are unpredictable but the overall trajectory of the bilateral economic relationship seems ominously clear.
Deal or no deal
President Trump – with one eye on talks with North Korea – has been considering a relatively narrow deal to temporarily halt escalation, but remains uncommitted following Commerce Secretary Wilbur Ross’ visit to Beijing last weekend. A compromise to prevent the outbreak of a trade war hangs in the balance, but the basic formula discussed involves:
- A package of measures to increase Chinese imports from the US, including in agriculture and energy, with some tied in through long-term contracts.
- An alternative formula for punishing Chinese telecoms equipment-maker ZTE, which would let it resume purchasing from US suppliers and avoid being effectively forced out of business.
- China reducing or removing tariffs on specific products including in agriculture; Beijing also in May implemented previously promised tariff cuts on autos.
- If agreed, the deal would probably prompt China to approve US firm Qualcomm’s acquisition of NXP – a major, politically sensitive semiconductor deal held up amid recent tensions.
This would prevent short-term escalation and secure some headline trade deficit wins, but does not seem to involve any major new concessions by China on more fundamental, structural issues such as its high technology industrial policies. To this end, Beijing has agreed to buy $70 billion in American products in the first year of a deal, as long as no tariffs go into effect, but has largely held its ground on its priority principles:
- Not agreeing to a very large, fixed number for trade deficit reduction (Chinese officials insist they have rejected any commitment to a reported $200bn reduction).
- Basing any reduction on increased Chinese imports rather than reduced exports.
- Keeping its industrial policies for rapid technological development off the agenda.
A deal along these lines is bound to be seen as a climbdown by many, particularly those in the business community who are more concerned about structural issues than transactional trade deficit reduction. The White House for its part can argue that it is only a climbdown relative to the much tougher stance of recent months – one which will deliver more short-term concessions than were otherwise on offer, even if they remain far short of ideal US goals. Regardless of your view, it is clear that the root causes of US-China trade tensions – which were growing long before Trump took office – have not been addressed.
There has always been an expectation that compared to some of his senior officials Trump is more interested in a quick deal for some headline wins, rather than digging in for a trade war in pursuit of more fundamental, systemic change from Beijing. This is the scenario currently unfolding, but even assuming that a deal is completed, several factors imply that the situation will re-escalate later this year:
- Trump’s recent conciliatory turn is probably tactical and temporary. He will trumpet the gains from a deal but is unlikely to be satisfied with China’s concessions or see them – as Beijing wants to – as a full or final settlement of disputes. He could change course again as early as June if his North Korea summit plans unravel (though they are more likely to bring some modest progress).
- Most of the executive-led measures the US has threatened against China gave the administration great discretion over implementation. Although Section 301 processes to introduce tariffs and investment restrictions involve some May and June deadlines, in practice the administration could revive these and other measures quite rapidly.
- The “time to get tough on China” narrative Trump once led has gathered greater and more broad-based momentum in recent months. The emerging deal is being criticized in the US Congress as a climbdown, more hawkish administration officials will press for a stronger line than Mnuchin’s, and the legislature is also aiming trade and investment restrictions at China.
The Committee on Foreign Investment in the US (CFIUS) has blocked some sensitive China-related deals in the past year and China-focused measures are being considered in the Congress. Some, such as the Fair Trade With China Enforcement Act, are unlikely to pass, but CFIUS reforms looks increasingly likely to be enacted within the next three months. This would increase capacity and scope of CFIUS to block inbound investments on national security grounds; separate changes to export controls could facilitate scrutiny of outbound investments, joint ventures, and technology licensing agreements. Multinationals will be increasingly caught between conflicting pressures and constraints from Washington and Beijing.
Diverging not converging
This year’s deterioration in bilateral ties has accelerated negative popular and political narratives in both countries that will probably not be reversed. The ZTE case increased the “patriotic” tenor of the trade debate in China. From official media editorials to popular blog posts, there is a stronger narrative painting the US as a hegemon determined to thwart China’s rise, including by constraining its economic and technological development. In this view, trade complaints are a pretext for hobbling companies like ZTE and Huawei that could become tech leaders.
In the US, there is growing bipartisan support for a tougher approach after years of failing to change China’s behavior through diplomacy and engagement. Even many who oppose tariffs support other forms of stronger pressure and view things increasingly through the lens of strategic national competition. The perception, fueled partly by Xi’s more overt ambition and unabashed brand of authoritarianism, is that Beijing is now simply too strong a competitor to be treated like a developing country and allowed to exploit US commitment to free trade and investment.
Underlying causes of friction are thus not just about Trump but about structural factors that are very likely to persist for years to come. The immediate threat of wide-ranging tariffs, bilateral investment restrictions, and punitive regulatory actions has receded but could return any time at short notice. Trends in both countries imply a more politicized trade and investment environment. Periodic trade disruption and an increase in restrictions on and scrutiny of multinational companies by both governments are thus likely to be long-term trends which go far beyond tariffs.
Andrew Gilholm is a Principal and Director of China & North Asia Analysis at Control Risks, the global specialist risk consultancy