US-China trade in the Year of the Pig

Theresult of last week trade negotiations between United States and China wasjudged as a positive step forward in the relationship between the two colossuses.However, the talks may represent no more than a tactical success for the TrumpAdministration and the constituency of farmers. Indeed, structural reforms arestill a mirage.

Themeeting between Trump and Chinese Vice President Liu He led to tangible resultsto avoid the US will raising duties from 10% to 25% on $200 billion of Chineseproducts next month. Despite no signatures, China promised to buy 5 milliontons in soybeans and to increase imports of agricultural and manufactured productstogether with services from the US.

So,progress? Yes, because the agreement has resulted in a more relaxed diplomaticatmosphere and helps reduce the US trade deficit towards China. For Trump thisis the “biggest deal ever reached” while Xinhua News spoke of a “candid,specific and fruitful” agreement. However, the road ahead is bumpy.

Atthe root of US/China tensions is American opposition to state capitalism.Beijing does not intend to cut ties between state and strategic industries in innovationand advanced technologies. This forms part of China’s “core interests” and itis the true apple of discord.

SuccessiveAmerican administrations argued that China threatens the competitiveness ofindustrial sectors that facilitate US world economic leadership – SiliconValley for example. Ever since Obama promoted the Trans-Pacific Partnership,the US sought to hinder the participation of state-owned companies in theAsia-Pacific trade. This was a way for Washington to maintain a mix ofgeo-economic openness and the geopolitical primacy required to impose an internationalrule of law favourable to US industries. Although the Trump Administration’ssanctions appear tactically more aggressive than the TPP, the strategic goalremains the same.

Theultimate objective behind current trade sanctions is an attempt to inflict free-marketdiscipline on China’s state capitalism which is the crucial source of Beijing’sgeopolitical muscles. By stimulating internal reform of the Chinese market, theUS aims at pushing Chinese industries into free competition in areas where Americancompanies have a competitive advantage. However – this betrays a subtle form ofmercantilism.

Itis through this lens that one should analyse the tension surrounding the Huaweiaffair and the polemics about China-sponsored technological thefts. We should alsokeep in mind that in this diplomatic-economic battle the agendas of bothgovernments are ultimately backed by increasing military budgets, a return to20th-century territorialism by China in the South China Sea and the US withdrawalfrom the Intermediate-range Nuclear Forces (INF) treaty.

Beijingseems to have a long-term advantage. The United States is constrained by thestructural limits of its grand strategy, based on the coexistence of globalmarket openness and national military superiority. China has become bothAmerica’s most important partner and worst enemy, therefore US foreign policytowards China has to steer a middle course between three diverging approaches –those of Treasury, Defense, and State. The difficulty in achieving a balancebetween these competing interests was palpable in the words of the Secretary ofthe Treasury Mnuchin, who pointed out ahead of the negotiations that the issuewith Huawei and the arrest of Meng Wanzhou have nothing to do with duties ontrade. However, it is impossible to separate the two aspects.

In a statement released at the end of talks, the White Houseemphasized that the 90-day roadmap agreed during the “Buenos Aires truce” inDecember represents a ‘hard deadline, and that United States tariffs willincrease unless there is a satisfactory outcome by March 1, 2019’.

The next meeting will be held after the Chinese New Year around the middle of February, when Robert Lighthizer and Steven Mnuchin will travel to China. 2019 is the Year of the Pig and in the Chinese Zodiac among a pig’s attributes are that they are good tempered but also impetuous. Each side will need to concentrate on the first and beware the latter.

Zeno Leoni is a Teaching Fellow in the Defence Studies Department, King’s College London