Published 05 April 2022
A combustible confluence of factors is pushing the US-China trade relationship, and the global trade system in general, into dangerous territory. The Ukraine crisis and the potential for the imposition of painful sanctions and countersanctions only exacerbates the volatility of the moment. As the existing trade system passes away, a new equilibrium will have to be established – but could it be achieved?
If one could invest in a futures market for trade relations, now would be a good time to bet on a more confrontational US-China relationship. In her testimony before the House Ways and Means Committee, US Trade Representative Katherine Tai underscored mounting frustration and diminishing patience with China. Tai told committee members that the Biden administration is shifting its policy and would focus on “vigorously defending” US economic interests through new trade tools designed to tackle China’s non-market activities.
Previously, Tai had stressed dialogue and consultation with China. More recently, she has acknowledged that talks with China are “extremely difficult and getting more difficult”.[i] The administration will now, in Tai’s words, “turn the page on the old playbook with China, which focused on changing its behavior.”[ii] While engagement will not be abandoned, domestic investments in competitiveness and sharper trade remedy laws will help the US defend “our values and economic interests from the negative impacts of China’s economic policies and practices.” Tai’s testimony marked a notable shift in tone.
For years, US trade policy was predicated on the assumption that US negotiators could coax or cajole China into being less like China – that is to say, less mercantilist and less statist. This was especially true during the 16 years of the Bush and Obama administrations, in which so-called strategic and economic dialogues were front and center. Round after round of consultations were convened and US officials painstakingly laid out their case. The hope was that this approach would ultimately produce the desired policy changes in China. That strategy was ill-fated from the start. Ambassador Tai is now plainly stating as much.
A third phase
US conventional wisdom on the US-China trade relationship has now entered a third Post-World War II phase. The first phase, from roughly the 1950s to the early 2000s, held that as China became more integrated into the global trade system, it would inevitably become “just like us”. Its economic system would evolve to resemble market-driven western economies more closely. Some degree of political liberalization was hoped for, if not expected.
During the second phase, commencing in the first decade of the 21st century, it was gradually recognized that China would never become “just like us”. However, dialogue was thought to be capable of inducing sufficient change to smooth over the most damaging aspects of China’s model of state-directed capitalism. The US and China would continue to maintain dramatically different systems, but these systems would cooperatively and productively coexist, provided China could be convinced to make certain accommodations and adjustments.
The third phase, which Ambassador Tai is now articulating, acknowledges that talking has failed to elicit the desired changes. While channels of dialogue will remain open, the US will more directly and forcefully confront China.
War in Ukraine
The crisis in Ukraine injects a new and complicating dynamic into an already fraught relationship. While professing a desire for peace, China has failed to condemn Russia’s invasion or even acknowledge that it is an invasion. It has placed blame on the US and refrained from imposing any form of economic, financial, or trade sanctions on Russia, despite the speed with which it sanctioned Lithuania over the opening of a Taiwan representative office. Officials in China have instead stressed the strength of their relationship with Russia.
As Russia struggles under the weight of sanctions imposed by the US and its partners, the trade and financial lifeline that China can provide becomes more important. For Russia, it is a matter of survival. For China, it is an opportunity to gain access to key commodities at fire sale prices, providing insulation from inflationary pressure. China is also likely gain influence through investments in Russia SOEs and private enterprises, further boosting its competitiveness.
The danger is that China could run afoul of secondary sanctions, which prohibit third parties from helping Russia circumvent sanctions. President Biden stressed this point in a recent two-hour video call with President Xi Jinping. For his part, President Xi doubled down on China’s support for Russia and emphasized US culpability.[iii] Nothing constructive emerged from the call.
The longer the war in Ukraine grinds on, the greater the likelihood that either companies or government entities in China are found to be in contravention of secondary sanctions. Any forceful US action in response would almost certainly elicit countermeasures from China.
Dangerous territory?
A combustible confluence of factors is pushing the US-China trade relationship, and the global trade system in general, into dangerous territory. The US has concluded that China’s predatory practices must be challenged through new trade tools aimed specifically at the country’s economic system. Consultations won’t disappear, but Trade Representative Tai has made it clear that she will be brandishing more powerful tools – and that she will use them.
The Phase One trade agreement and the anticipated Phase Two negotiations have slid to the back burner. The Biden administration has shown little inclination to pursue WTO channels. The US will confront China unilaterally or in concert with like-minded partners. The Ukraine crisis and the potential for the imposition of painful sanctions and countersanctions only exacerbates the volatility of the moment.
Seeking new equilibrium
The existing trade system, established after the Second World War, has been largely successful in delivering stability, societal development, and a constructive, cooperative spirit in trade relationships. That system has now begun to unravel. Countries have become increasingly comfortable weaponizing their trade relationships. Trade has become a primary arena in which geopolitical tensions are played out. The cooperative spirit that permeated trade relations for most of the post-War era has been replaced with a more hard-edged, zero-sum mentality. Favorable assumptions about the benign intentions of trade partners and the benefits of integration are being replaced by greater skepticism and a heightened sense of the vulnerabilities and downsides that can accompany trade.
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As the old system passes away, a new equilibrium – one that balances the pursuit of sustainable and mutually beneficial trade with a more realistic understanding of the risks – will have to be established. It won’t happen overnight, and we almost certainly won’t get it right immediately. Watch the US-China relationship closely. The way in which these two countries navigate the minefield ahead of them over the next several months will tell us a lot about how much confidence we should have in our ability to achieve that new equilibrium.
[i] https://www.reuters.com/business/us-trade-relationship-with-china-getting-more-difficult-ustr-2022-02-25/
[ii] https://ustr.gov/about-us/policy-offices/press-office/speeches-and-remarks/2022/march/testimony-ambassador-katherine-tai-house-ways-means-committee-hearing-presidents-2022-trade-policy
[iii] https://www.politico.com/news/2022/03/18/bidens-call-with-xi-bilateral-deadlock-00018622
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From 2014 to January 2024, Mr. Olson was a Senior Research Fellow of the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international trade negotiator and served on the US negotiating team for the NAFTA negotiations.
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