A smoother road with China?

In mid-January 2020, the road ahead for US-China trade relations seemed fairly clear. Both countries had just concluded a much heralded Phase One trade agreement, requiring China to make over $200 billion in purchases of US exports and both sides had committed to follow-on Phase Two negotiations which were intended to more meaningfully address the structural issues bedeviling the relationship. President Trump heaped praise on his “friend” Xi Jinping, and there was hope that the trade relationship could be put on a fundamentally sounder footing.

How quickly the world can change. A few short months later the coronavirus (or the “China virus” as President Trump refers to it) has caused economies and trade around the world to seize-up, China has fallen far short of its Phase One purchase commitments, plans for Phase two negotiations have been unceremoniously dropped, and the broader bilateral relationship is at a historic low point.

President-elect Biden will immediately face three questions: 1) what to do with the punitive tariffs put in place by his predecessor, 2) what to do with the Phase One agreement, and 3) how to move forward more broadly on trade with China?

Expect the tariffs and the Phase One deal to remain in place, at least initially. Given all the tough talk about China during the campaign, there is no political cover to abruptly ease-off on the tariffs – and even less substantive reason to do so, given the implementation shortcomings. Terminating the agreement however would unnecessarily antagonize the relationship, with little apparent gain. And assuming the Chinese economy continues its strong recovery, the pace of Chinese purchases should be ramping-up by the time Biden is sworn in – all the more reason to keep Phase One in place.

Over the longer term, Biden will essentially pursue the same list of grievances as his predecessor, but unlike Trump, will attempt to construct a united front in close coordination with the EU, Japan, Australia and other like-minded countries. Where and when possible, Biden would be more inclined to work through WTO channels. Ultimately, Biden’s approach could be more challenging for Beijing.