Strategic Issues in the US-China Trade Relationship

When US and Chinese trade negotiators met in Washington on January 30, the context featured escalating bilateral tensions over issues far broader than traditional trade policy. The meetings occurred in a fittingly freezing city, with plunging temperatures outside accompanying the deep freeze that has gripped the bilateral relationship. US allies in Europe and Japan presumably cheered quietly from the sidelines as US policy makers took a tough stance.

But the more important point is that US policy makers are giving every indication that concessions on the less important (but politically powerful) agriculture and goods sectors will not be sufficient to mollify negotiators who are more focused on strategically significant 21st century sectors, such as 5G networks and handheld communications devices.

The standoff illustrates well the brewing battle underway globally as trade policy makers attempt to transition the post-war trading framework to address traditionally non-trade areas. Viewed from this perspective, the IP theft drama taking center stage in the bilateral US-China trade talks may best be viewed as a new kind of trade war in which old economy tools are used to achieve concessions on new economy sectors.

  • European Union: The European Commission on January 9 published statistics showing that Europe — not China — is the largest export market for US soybeans. It also promised to increase European purchases of US soybeans for biofuels use. Policy makers on January 29 implemented that promise, roughly twenty-four hours before bilateral US-China trade talks were set to begin in Washington. At the beginning of the year, EU officials filed with the World Trade Organization (WTO) their plans to extend their own steel tariffs. The move brought the EU into harmony with the United States regarding imports of Chinese metals.
  • Japan: Leaks to the Japan Times indicate that policy makers in Tokyo are proceeding slowly regarding a bilateral trade deal with the United States. The shift in momentum leaves the US Trade Representative free to focus on Chinese talks.

Economic diplomacy generates jagged progress across multiple issues and in multiple platforms, not a linear progression of wins and losses. Assigning a win/loss rate on individual issues is at least as misleading an indicator of policy trajectories as a singular focus on the goods deficit.

The good news is that the global trading system has been here before. When policy makers met at Bretton Woods in 1944 to craft the current international and multilateral system, the parties at the table included China and Stalin’s Soviet Union, both which rejected free market principles. If wartime leaders could manage to craft the current architecture that has delivered significant growth globally for decades, it is reasonable to believe that today’s leaders can manage at least to avoid classic, debilitating trade wars.

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