China: The Dust Never Settles

June 4, 2018

I said two weeks ago that I was going to hold off on writing about China again until the dust settled. It now appears that the dust is never going to settle. Each time the United States seems to be set on a course of action, the president shifts gears and kicks the dust up all over again. Many people have commented on how bad policy chaos and uncertainty are for businesses simply trying to survive in a competitive world, so I won’t go down that particular road except to say I agree with the concern. In my experience representing businesses, what they most value from their government is policy consistency and clear lines. The vast majority of them want to obey the rules, but to do that they need to know what the rules are, and they need to have some confidence that today’s rules will be the same ones they’ll be expected to adhere to next week, next month, and next year. Sadly, we are a long way from that.

Substantively, it appears that the four-pronged China plan I wrote about in January is taking shape. Tariffs have been announced and, as of this writing, are scheduled to be imposed at some point after June 15. Restrictions on Chinese investment will be announced by June 30, and new case-by-case restrictions on visa lengths are scheduled to go into effect on June 11. One World Trade Organization (WTO) case has been launched, and we can expect more.

Of course, since our strategy is ever changing, no one can guarantee that any of these things will actually happen. The tariffs in particular seem to be used more as a leverage tool (and this time around to refute the accusation that the president is “soft” on China in the wake of the ZTE debacle) than as part of an actual strategy intended to be implemented. They also stand out in the list of four as the only ones that have nothing to do with the technology theft and transfer issues identified in the Section 301 report as the problem we want to solve. There has been an attempt to cover that up by arguing that the tariffs will be imposed on products that have benefitted from technology transfer, but that is belied by the actual list of items. Perhaps the final list will be more focused.

The other parts of the strategy, however, are serious attempts to deal with the problem and should be viewed outside the negotiating framework with China that is evolving. The latter appears to be focused on short-term market access concessions, with tariffs as the stick being used to bludgeon the Chinese into submission. Aside from a near-universal distaste for tariffs, observers have been of two minds about these negotiations. On the one hand, if the president can be bought off with more cars, gas, and soybeans, then perhaps a trade war can be averted. On the other hand, that would solve none of the problems the United States has identified.

Thus far, the Trump administration has tried to finesse that dilemma by wanting to have it all—more market access and significant internal Chinese reforms. When I first wrote about this, I thought the administration would eventually have to choose, with the first route being considerably smoother than the second. Now I think it will continue to demand everything. (This also appears to be the approach in the North American Free Trade Agreement talks, where a deal on autos is in sight but unattainable because the United States refuses to make any concessions on anything else. Wanting to have it all seems to be a meme.)

If so, we may see a two-phase negotiation. Secretary of Commerce Wilbur Ross will continue his efforts to secure market access concessions from China that are specific and guaranteed rather than promised and imaginary, and the threatened tariffs (from both sides) will loom over those talks at least until the president gets a trade deficit reduction number he thinks is big enough to brag about.

Then attention will shift to the far more difficult task of persuading China to reform its economy, drop the Made in China 2025 program, and transition to a real market economy. The tariff threat might be used there as well, though the Chinese, no dummies, have effectively made getting rid of them a condition of a market access agreement. But the United States has now rolled out other leverage tools—investment, visas, and WTO litigation. These tools have the two advantages of being relevant to the problem and relatively unencumbered by international obligations but also the disadvantage of providing less negotiating flexibility. Since restrictions on investment (including expanded export controls to address outbound technology transfers) and visas are clearly related to national security, relaxing them, as the Chinese will surely demand, exposes the president to more criticism of being soft on security and China. One need look no farther back than the most recent ZTE episode to see how that could play out.

That means we have not seen the last of tariff threats even if there is a market access agreement, and it certainly means the dust will continue to swirl for quite some time.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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