By Steve Banker
A Chinese Ministry of Commerce spokesmen announced today that the U.S. and China have agreed to roll back tariffs in phases. If the two sides reach a Phase 1 agreement, “both sides should roll back existing additional tariffs in the same proportion simultaneously” according to news reports. “in the past two weeks, top negotiators had serious constructive discussions…” Markets and stocks reacted positively.
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But U.S./China trade expert warns that not too much should be read into these kinds of announcements. The U.S./China trade relationship will never be what it was before President Trump took office. Further, it would not matter too much whether Trump or Clinton had won the election, this relationship was headed toward a correction.
Amy Celico, a Principle at the Albright Stonebridge Group, spoke on U.S.-China trade relationship at the Northeast Cargo Symposium in Providence, Rhode Island yesterday (November 6). Ms. Celico is certainly qualified to speak on this topic. Prior to joining this high-powered consulting firm she served in the US State Department in Shanghai first as a Foreign Affairs Analyst, Bureau of Intelligence and Research and then as the Vice Consul at the U.S. Consulate. Then she moved over to the U.S. Department of Commerce where she served as Deputy Director in the Office of Chinese Economic Area and then as the Senior Director for China in the office of the U.S. Trade Representative. She served during both the Clinton and Bush administrations. She is fluent in Mandarin and has high level contacts in both governments.
Ms. Celico is not alone in urging caution around trade pacts with China. Her analysis in mirrors several of the points made in a report that was released by the Hoover Institute last November.
Ms. Celico explained that the hope behind the Interim Phase One deal is to take some of the tension out of the relationship so that more and bigger deals will be possible subsequently. “The US and China are the twin propellers of global growth,” so an improved relationship is important not just to China and the U.S., but to the world. Phase One’s goals for the U.S. are to have China buy more U.S. goods, particularly agricultural products. China wants the tariff increases to stop, and indeed for some of the tariffs to be rolled back.
“But,” Ms. Celico explained, “the relationship has not been this bad since 1989. I mostly blame the Chinese government.” Six years after joining the World Trade Organization, an organization that promotes free trade, more and more barriers to free trade were being put up by China. China’s goal was to “promote indigenous innovation and create Chinese global leaders” in a variety of industries.
Politically, the U.S. started to shift toward pushing for more balance in the relationship. This policy went by the name “constructive engagement” and was bipartisan. It addressed bilateral economic, weapons proliferation, human rights, and climate issues as a bundle and was premised on the idea that both sides had more to gain from engaging on these issues than from letting the relationship deteriorate. The idea was that commercial relations could balance out concerns about the Chinese human rights, military buildup, and climate issues.
“But by 2015-16,” Ms. Celico said, “many in the American business community were feeling China was gaining more from this policy, and they were gaining it at the expense of US business.”
American politicians and diplomats were coming to the same conclusion. For forty years, China adhered to Deng Xiaoping’s policies of reform and opening to the outside world and peaceful development. After Deng retired, these principles continued to guide China’s behavior. The motto, Ms. Celico explains, was to “hide and bide.” “Hide your strength and keep your head down.” The situation began to change dramatically in 2012 when Xi Jinping came to power. He has accelerated the more assertive policies initiated by Hu, his predecessor. These policies seek to redefine China’s place in the world as a great global player that assertively pushes its interests forward.
An analysis from the Hoover Institute points to other issues that have undermined the relationship. There are myriad ways in which Beijing has more recently been seeking influence, some of which could undermine our democratic processes. These include efforts to penetrate and sway a range of groups and institutions, including the Chinese American community, Chinese students in the United States, and American civil society organizations, academic institutions, think tanks, and media. Some of these methods involve “the use of coercive or corrupting methods to pressure individuals and groups and thereby interfere in the functioning of American civil and political life.”
“So regardless of who was elected in the last election, it was going to be a more contentious relationship,” Ms. Celico opined. We have entered a “game of leverage” with both sides “misaligned with reality” in significant ways.
Trump’s tariffs were an attempt to gain leverage. These tarrifs did bring China to the negotiating table. And if no deals are signed before December 15, many trade goods could move from a 15% to a 25% tariff.
But Beijing believes it has leverage as well. “Their politicians don’t face elections,” Ms. Celico pointed out. The economic slowdown does hurt, their economy is shrinking at the fastest rate since 1990, but the “Chinese government is saying we will wait it out.”
Trump’s U.S. Trade Representative, the person in charge of negotiating the deal from the U.S. side, is Ambassador Robert Lighthizer. Lighthizer has long seen China’s trade policies as unfair to the US. It is unfair that China forces technology transfers as a price for doing business in China, that they subsidize their industries, that they engage in intellectual property theft, and that they manipulate their currency to make their exports less costly.
Both sides want a short-term deal, but we need to recognize that “global competition is not going away. We have to think differently.” Ms. Celico summed it up by saying, “things will never go back to the way it was ten years ago!”
According to the Hoover report, “constructive vigilance” should be the new policy. This is “the best way to begin to protect our democratic traditions, institutions, and nation, and to create a fairer and more reciprocal relationship.” This sounds a lot like “trust but verify” to me.