Pacific Money | Economy | East Asia

An Endgame for Beijing in the US-China Trade Negotiations

Creating a long-term mechanism should be the primary objective of U.S.-China trade negotiations.

By Chen Gong for
An Endgame for Beijing in the US-China Trade Negotiations

In this Nov. 9, 2017, photo, U.S. President Donald Trump, left, and Chinese President Xi Jinping prepare to shake their hands after a joint press conference at the Great Hall of the People in Beijing.

Credit: AP Photo/Andy Wong

At the beginning of the new year, U.S. President Donald Trump announced via Twitter that the first phase of the trade deal between China and the United States will be signed at the White House on January 15, 2020. The U.S.-China trade dispute, which has lasted nearly two years, appears to have abated for the time being. But at the same time, Trump also said that he will later travel to Beijing to begin negotiations on the second phase of the trade deal. In this context, the U.S.-China trade negotiations are clearly far from over, and the major pattern of future world trade has yet to be set.

After the specific contents of the “Phase One” trade deal were announced, it caused certain controversies within China. In terms of a cost-benefit analysis, some analysts believe that the Chinese side has made too many concessions. It can be seen that the Chinese thinking on U.S.-China trade negotiations is still based on the old-school perspective of doing business. Obviously, for the sake of a relatively stable external environment, China’s concessions are acceptable. However, with the “Phase One” trade deal in place, one question that needs to be seriously considered is, even if all goes well, how long will the post-deal “truce” last for China? Although few have been explicit about the expected duration of the “truce,” judging by the more relaxed attitude of the majority in domestic markets, many people think that Trump’s trade dispute with China is over. Unfortunately, such perceptions are not necessarily realistic.

Over the past two years of negotiations between China and the United States, there have been countless examples of Trump’s commitments being unreliable. His background as a businessman suggests that he believes in a set of principles quite different from those of diplomatic negotiation. In diplomatic negotiations, each commitment must have a certain degree of credibility and leave enough room for maneuver for the other party, otherwise the negotiation will be unable to proceed. In most commercial negotiations, by contrast, squeezing opponents and maximizing benefits for oneself are the most common criteria. We can see similar attitudes in the Trump administration’s approach toward the North Korea nuclear issue, the Iran nuclear issue and the military expenditure of U.S. allies. Trump has almost always gone “all-in” during diplomatic negotiations to maximize the interests of the United States. When his goals are not achieved, he will also turn to “salami tactics” to maximize his own interests, even if it undermines the credibility of American policy around the world.

The “Phase One” trade deal with Beijing is now worth a lot for Trump. It is one of his few “diplomatic achievements,” as the deal goes some way toward fulfilling Trump’s commitment to making China to further open its market through tariffs imposed. Facing aggressive Democratic candidates and an impeachment trial, the Trump administration needs similar diplomatic achievements to prove to voters the effectiveness of its policies. Therefore, the duration of the current “Phase One” trade deal is likely to be much shorter than expected. After fulfilling the short-term demand for agricultural purchases by China and garnering support from the agricultural producing states, it is feared that Trump will raise more U.S. demands in the second phase of negotiations. By then, the United States will undoubtedly put forward more stringent requirements on intellectual property protection and industrial subsidies, which, as Trump himself has claimed, are the root cause of the trade dispute, since they affect the global competitiveness of American industry. If China and the United States cannot reach a consensus at that time — and it is difficult to reach a consensus — the “decoupling” of at least some part of the U.S.-China relationship may become inevitable.

So, under such circumstances, what kind of attitude should China adopt toward the future U.S.-China negotiations? There can, of course, be different points of view on this issue, with different focuses. From a geopolitical perspective, trade benefits are important, but for China, the establishment of a long-term mechanism for economic and trade relations between China and the United States should be the primary goal of future trade negotiations with the United States. In other words, the primary goals are to achieve the overall economic and trade stability of China and the United States, and to form a stable framework and consultation and communication mechanism agreed upon by both sides. Everything else is secondary.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

One of the first things to realize is that while the waging a trade war is certainly a manifestation of the U.S. policy of containing China. Yet the trade talks with the United States also provide an opportunity for China to further improve its own economic structure, promote marketization, and see more stable integration into the world economic system. As Anbound Consulting has pointed out, if progress can be made on issues such as intellectual property protection, it will also be beneficial to China’s economic development. Only by establishing a long-term mechanism can China gradually turn trade risks into a driving force for development, and effectively mitigate risks through the mechanism, which is beneficial to both China and the United States. The current “Phase One” trade deal goes no deeper than the level of trade. The rapid expansion of large-scale imports is a time bomb for China’s future industrial development, especially for the stability of the agriculture sector in China.

The second problem is that only a long-term mechanism can form a binding force in American society to prevent Washington from again using trade issues to oppress China and gain geopolitical leverage. Its trade war policy was implemented due to two converging trends: the “maverick” characteristics of the current U.S. government, and the widespread dissatisfaction in the United States with the openness of the Chinese market. Once a long-term mechanism is established, appeals from American companies and other private institutions will be fully communicated and discussed under such a framework and mechanism, so as to be met to some extent. In addition, having a relatively transparent mechanism means that both Chinese and American societies will become stabilizing forces for similar mechanisms, and the political influence will also be limited. After all, the Trump administration’s contempt for the international trade dispute mechanism has actually caused quite a controversy at home. Having a trade mechanism in place with China will, to a certain extent, limit the future policies of the Trump administration, which means that China will have a greater opportunity to achieve a stable external environment and safeguard its own interests. At the same time, the establishment of a long-term mechanism will also help to stabilize the market’s confidence in China’s economic development, so as to avoid unpredictable market fluctuations caused by the lack of confidence of central banks worldwide.

The third problem is that trade negotiations between China and the United States are not just about these two countries. China should consider mobilizing, utilizing, and acquiring global resources and global sympathy in geostrategic terms. Globalization has always been a concern of geopolitics; there are many disputes on related issues and no consensus has been reached. A deep-seated question involved in the U.S.-China trade negotiations is whether the post-Cold War globalization process characterized by institutionalization and regularization has come to an end. This is a big question that concerns almost the entire world. It is conceivable that if China and the United States, two major trading powers, ignore globalization and replace multilateralism with bilateral trade, such a result will have an impact on globalization. As a result, the consequences of trade negotiations between China and the United States will actually affect the economic policies of almost every country. This is the reason why although the U.S.-China trade negotiation is a bilateral affair of China and the United States at the micro-level, the process is being closely observed by many other countries. In fact, whether China chooses to support bilateral or multilateral processes, the consequences of U.S.-China trade negotiations will affect the stance and attitude of other countries toward globalization. On this issue, China can win the respect of other countries through its efforts to build a long-term mechanism.

The worst-case scenario is that while the United States tramples on WTO principles and pursues unilateralist policies, China does not insist on rebuilding the free trade regime, so as to utilize the U.S.-China negotiations to improve China’s international image and win more international support. Instead, the trade negotiations between the world’s top two economies can only see a naked division of interests and bargain on a unilateral basis, which indicates the collapse of the old globalization model and the return of the pure national interest diplomacy. In this way, China may lose points in all aspects, encouraging the world to reconsider trade relations with China even while China’s external environment will undoubtedly become more unstable. If, for example, the United States could use tariffs to force China to make concessions on certain issues, would Japan replicate a similar approach?

As a result, China’s concessions in U.S.-China trade negotiations are not only for the sake of that bilateral trade relationship, temporary stability, or simply to meet the unilateral needs of the United States. There is another interpretation: that China, through its past concessions and future negotiations with the United States, is seeking to obtain an international image as a defender of the globalization process, free trade, and institutionalized dispute resolution principles.

To sum up, the establishment of a long-term mechanism should be the primary goal of China’s future trade negotiations with the United States. The construction of such a mechanism will be a complicated international trade law project, which needs to find a reasonable balance between interests and compromises. In reality, what we hear now about trade negotiations is a game of American demands and its interests, one that does not reflect China’s interests, especially in the long run. Therefore, for China at present and in the future, it is undoubtedly more important to clarify the general direction of U.S.-China negotiations. Only the establishment of a long-term mechanism can China truly realize the long-term stability of its external economic environment, break free from the “rock-paper-scissors” negotiation game, and establish a solid position for itself in the world trade environment. At the same time, the establishment of such a long-term mechanism is actually a form of bilateral trade negotiations, which is in line with the interests of the United States and world trade, and has potential prospects as a target of common trade value.

Founder of Anbound Think Tank in 1993, Chen Gong is now Anbound Chief Researcher and one of China’s renowned experts in economic information analysis, particularly in the area of public policy.