The Challenges to Forging a U.S. — China Trade Deal
By: Zachary Durkee
Tags: World, Politics, China, Trade War, Economics

Photo by chuttersnap on Unsplash

Forging a trade deal with China has proved to be a frustrating, fluctuating saga for the Trump administration as months of talks between the two economic powers ended with increased contention and a 15% increase on the preexisting tariffs placed on Chinese goods last year. The seemingly bi-weekly flights between Beijing and Washington officials proved to be ineffective in closing the wide split between the two.

What all of this displays is that formulating a compromise between the two — or having a deal struck it all — is not as simple as getting China to purchase more American products to mitigate the trade deficit. Mr. Trump is cognizant of this reality and more than likely knows if he ends with a deal in this manner, the 2020 Democratic Presidential candidates will paint him as being, as he likes to put it, “too soft on China.” A deal on this level would fail to sew the true issues plaguing trade with China. The discrepancies between the two lie more in deep structural differences cemented by two very different economic systems, ambition to gain the upper-hand in coveted industries, and natural competitive pressure exerted by China’s rise.

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Why is striking a deal proving to be so difficult?

People have to keep in mind that the Chinese Government is highly authoritarian and holds much of its power through its grip over economic modes of production. Where American officials view Chinese State Owned Enterprises (SOEs) as distorting cheaters of the global economy, the Chinese Government sees them as agents of co-option, providers of vital jobs to prevent dissent and maintain order, and an inextricable link to the state in order to achieve national economic goals. Simply arguing that China ought to become more market driven is not an option for political leaders in China. For any authoritarian country, maintaining a strong grip on power is of first priority. Liberalizing an economy in which resources are exceedingly centralized in the parameter of government influence can open the door for instability and unleash forces that can grow outside of the state’s control (Remember the Soviet Union?). This balancing act of privatization and state direction can broadly be observed by how the Chinese economy has fared since the end of the Mao era. The government has made sure that its move to extract wealth and grow its economy from exposure to market forces have not ceded the state’s overwhelming monopoly on resources, influence, and power, or jeopardized the regimes survival. Even until today, China’s branded state-pseudo capitalism has operated quite well. The state has defied the odds of liberalizing several aspects of its economy through allowing the flourishment of powerful private enterprises while simultaneously becoming evermore illiberal. Maintaining massive subsidies, holding broad access to capital, and propping up unproductive SOEs is simply part of the nature of China’s political-economic nexus. It’s challenge in maintaining this order is twofold. On one hand, the Chinese Communist Party has extracted legitimacy through a strong economy that is exceedingly evolving to require higher levels of efficiency which can only come to fruition through unleashing individual creative capacity and enabling businesses to operate untamed and unshackled from encroaching government influence. On the other, the regimes survival in its current state requires the government to hold the vast majority of the cards and influence large aspects of the economy. The former requires a sacrifice of the latter. This challenge leads into the second area of trade contention: coveted industries and unfair trade practices.

As I’ve previously argued in a past article, the nature of China’s economic model forces it to adopt controversial trade practices to substitute it’s innovation deficit. A world-class economy requires world-class ideas and inventions to sustain its growth and separate itself from the rest of the pack. America’s resilience and ability to create is directly linked to its political system: people are free to express themselves which leads to a proliferation of ideas coupled with competition which forces companies and individuals to be productive. At the forefront of the trade war is America’s adamant demand that China curb intellectual property (IP) theft, allow greater access for American companies into the Chinese market, and upend the regulations and political pay-to-play bulwark designed to force American companies into joint-ventures with Chinese firms or to hand over IP if they wish to have access to the Chinese market. As high technology increasingly comes to the forefront of economic importance, China will be less inclined to simply halt what it has been doing for decades. Stability in U.S.-China trade is important, but so is pushing ahead in securing a dominant position in coveted high-tech industries. Picking off IP and leapfrogging across the backs of American firms has been a key factor in China’s ability to make such substantial progress in closing the technological gap between the two countries in such a short span of time.

REUTERS/Philippe Wojazer

The competitive streak manifested between both countries on virtually all fronts is not helping secure a deal either. Mr. Trump and Mr. Xi are both looking to walk away as winners. Both see anything short of a definitive upper-hand in a deal as unacceptable. Behind all the structural realities guiding Beijing’s refusal to cave to American demands lies a strong propagation of nationalism, pride, and fervor of prestige pushing back against compromise. People in China genuinely view current American attitudes and actions against China as a coordinated scheme to contain and constrain China’s growth. With all of this in play, can anyone see a trade deal that works in both’s favor actually occurring? Optimism has been renewed with Mr. Trump and Chinese President Xi Jinping’s prospected meeting with one another at next week’s G20 summit. Nothing is on the table yet, and as demonstrated with Mr. Trump’s last meeting with Kim Jong-un, he’s always willing to walk away, even when the stakes are high.