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August 1, 2017

No Rabbits Pulled Out of Hats at the Comprehensive Economic Dialogue. Now What?

Center for Strategic & International Studies

July 16, 2017, marked the final deadline under the highly publicized Donald Trump–Xi Jinping 100-day action plan for resolving key U.S.-China trade issues, a major outcome of the two presidents' April 2017 meeting in Florida. Intensive, results-oriented negotiations on a small set of specific issues were supposed to transform how effectively the United States and China would be able to solve problems. But that did not happen.

On July 19, Chinese and U.S. leaders gathered to celebrate the end of the 100 days, with rumors flying that they might announce agreements on everything from curbing China's excess capacity in steel to reducing China's market barriers to U.S. exports like autos and technology products, increasing the transparency and fairness of the regulatory process and halting other policies favoring Chinese domestic champions. Long-time observers know that China calibrates its responses to perceived political need, so many were startled when no new agreements of any kind emerged from this major meeting.

What happened? China faces a major political leadership transition this fall and presumably would have been willing to put something on the table to try to maintain a stable environment through the end of 2017. Perhaps divergent views emerged among U.S. leaders as to what was enough, or it may be that China's calculus was flawed regarding how to make progress with the new deal-maker president in the White House. In any event, the question of the moment is "now what?" What should the United States do? What should China do? And what will they do?

It may be useful to begin by asking what problem the United States is trying to solve. The silence at the Comprehensive Economic Dialogue (CED) raises concerns that we may be facing a situation where U.S. political and economic realities are colliding, or stable U.S. decisions on the strategy to deal with China have not yet crystallized. This will not make it easy to move forward.

On the U.S. political side of the equation, the Trump administration has focused on the bilateral trade deficit with China as the core problem. This number creates a vivid proxy for U.S. grievances, despite economists' views that bilateral trade deficits are not in fact reliable symptoms of problems in a trade relationship. But how much of a dent can be made in this deficit anyway? Increased exports of U.S. rice, beef, autos, and liquefied natural gas will not erase it, so what will be viewed as "enough" to declare victory?

Furthermore, just increasing exports (or restricting imports) will not resolve fundamental U.S. economic concerns with China, including the potentially huge challenges to U.S. long-term interests created by the Chinese government's interventions in the Chinese market. Yet these Chinese market distortions will require a long, tough, inch-by-inch slog to try to correct, and many may only be correctable if China agrees they are a problem. (A topic for another day—the strategic actions the United States should take that do not require China's cooperation, both at home and with its allies, to strengthen our economy and the trading system.)

That brings us to some Chinese realities that have to be considered. It seems that each U.S. administration has to learn anew how China ticks. A few basic points are worth reviewing:

  • China isn't a client state that will change policy because we want it to;
  • China isn't a long-time ally with reliably shared values (though China isn't a gangster state either, with no concerns whatsoever about its global reputation);
  • China is a powerful economic player, whose power will only increase, regardless of what the United States does;
  • Given China's global economic position, broad-scale restrictions on U.S.-China bilateral trade will cause negative blowback for the U.S. economy;
  • China remembers perceived grievances for a very, very long time;
  • China will fiercely protect what it views as its self-interest, but its interests coincide with ours in some spheres.

Given these realities, the United States cannot easily intimidate China and, rationally, given the adverse effects on Americans, should not want to impose truly punishing trade restrictions to try to pressure China to accede to U.S. demands. The United States will not be able to move China fundamentally on economic matters where the Chinese see a situation differently, in any event. We also surely will not create a major shift in policy direction before Xi finishes his leadership transition this fall.

At the same time, China may well want to keep U.S. relations as smooth as possible while Xi is in this sensitive period. So, pragmatically, it seems, the United States would look for shared interests, like areas where our jobs and exports can promote Chinese economic reform and try to harvest some meaningful, if not paradigm shifting, outcomes soon while this dynamic is in play. (In this connection, it is worth keeping in mind three basic rules for high-level negotiations outlined in a CSIS Commentary on the outcomes of the 2016 G20 meeting. It seems that Secretary of Commerce Wilbur Ross and Secretary of the Treasury Steven Mnuchin have grasped the first rule of limiting the number of the top-level issues. In the early harvest for their 100-day plan, though, some outcomes emerged that were old wine in new bottles, and in a few instances, water was mixed into that wine.)

The complexities mount, however, because of our deal-maker president. When it comes to China, it may be that President Trump wants to call the shots and will not let even his top team make key decisions. That adds an unpredictable element to the equation—can a stable strategy be implemented? Can any deal be cut if Trump is not personally involved? And can he know enough to make an informed decision about when to declare victory? As Secretary Ross and Secretary Mnuchin have noted, the trick with China is to get specific commitments whose implementation can be tracked and verified, so they are held accountable. That requires details, and that requires a nuanced sense of context.

The Trump administration also includes proponents of dramatic political gestures and officials who believe China is intent on crushing the United States economically. President Trump’s base has reacted well to rhetoric blaming China for U.S. economic problems. If domestic U.S. political considerations prevail, there may be no quiet talks to try to make significant progress on some useful issues. Instead, we may see a flurry of highly publicized restrictions on Chinese products and other Chinese commercial interests, accompanied by sharp negative commentary.

What will China do then? Another major question. China has a strategic vision for its economic relations with the United States, and Xi will act decisively if he is challenged. If the United States blatantly crosses a red line, expect strategic retaliation of serious proportions and a potential long-term rift that could be dangerous. If the United States' actions stop short of this, expect calibrated responses. In this case, will China still quietly evince a willingness to consider U.S.-requested policy changes that both help U.S. business and enhance the sustainability of the Chinese economy? China plays the long game. They might.

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