Leverage

Last week’s trade news was dominated by the latest U.S.-China trade deal, although the tragic airplane crash in India and Israel’s attack on Iran quickly pushed it off the front page. The announcement of the trade deal followed what has become a pattern with the Trump administration: Announce the agreement, explain how great it is, and don’t release the text until later, if ever. That puts journalists in the position of only being able to report what the administration says about it. Real analysis of what is, and is not, in it must wait until a text is available, but by the time that happens, public attention has moved on to other things, and the analysis disappears into the ozone. As a result, there is little accountability for these agreements, and those who want to comment on them in real time are reduced to speculation about their actual contents.

With that caveat, I am going to provide my speculation. For a better and more detailed explanation, read my colleague Scott Kennedy’s piece, which was just published in Foreign Policy. Overall, the agreement amounted to a ceasefire. It was essentially a repeat of the May 12 agreement reached in Geneva. In other words, last week the two sides promised to do what they had promised to do last month, but this time they mean it—apparently.

Each side had criticized the other for not implementing its part of the Geneva agreement, with the United States accusing China of slow-walking its commitment to restart exports of industrial magnets and certain rare earths, and China accusing the United States of violating the spirit of the agreement—probably a reference to the U.S.-announced intent to exercise export control over the latest Huawei chips that came a day after the Geneva meeting.

I had initially attributed China’s slow implementation of export licensing to standard bureaucratic technicalities involving verifying the product and its destination—the same due diligence undertaken by the Department of Commerce’s Bureau of Industry and Security. Later on, I concluded that while it was partly a case of caution by mid-level bureaucrats not wanting to make a mistake and get in trouble, it was also a deliberate effort to send a signal to the United States that China was not without cards in this game and intended to play them.

That signal showed up again in last week’s agreement. There appear to have been two tradeoffs in addition to maintaining tariffs at the levels agreed to in Geneva (10 percent for China and approximately 55 percent for the United States composed of 20 percent for fentanyl, 10 percent for the baseline tariff assessed on all countries, and an estimated 25 percent to account for the other preexisting tariffs leftover from Trump 1.0 and Biden).

The first was magnets for students. China agreed to resume exporting magnets essential for use in automobiles and a variety of high-tech and defense-related items, and the United States agreed to continue to allow Chinese students to study here. (In my view, that is a double win for the United States. We get the magnets, and we benefit from having the students here.) Fewer details have been provided for the second tradeoff, which appears to be rare earths for export controls. China has imposed its own export controls on a wide range of rare earths and other minerals over the past several years. Exactly which ones will now be licensed for export is not clear. Similarly, the United States has a large number of controls on exports to China. Which ones will be rolled back is not clear, although it appears they will be the limitations on commercial aircraft parts and chip design software that were imposed recently. Here, details matter. This is big or small, depending on what is included.

Looking at the deal, I see two important things. First, unlike the way Trump has tried to structure the negotiations with other countries, which involves them making concessions and us simply not carrying out the threat of tariffs, this one involved U.S. concessions. (It’s a fair point that the other agreements will end up including U.S. concessions as well, as the deal with the United Kingdom did, and that the whole strategy may be crumbling, but that’s a topic for another column.)

The other is that the deal makes clear that China has leverage and used it adroitly. The Trump assumption going in appears to have been that the Chinese economy is in serious trouble, and the threat of restricting access to the U.S. market will force them to make concessions. So far, it hasn’t played out that way. Their economy may be in trouble, but they seem to be managing it better than expected, along with suppressing any dissent and playing, again, the anti-American nationalist card. So, instead of giving ground, China is reminding us, with increasing clarity, that they have things we need, and without them, our economy will be in trouble. They have been hinting at that for several years, but now it appears they understand the extent of their leverage and have demonstrated their willingness to use it. That upends the Trump strategy of bullying to force concessions and will force him back to a “normal” negotiating strategy that could lead to win-win outcomes, although in the Chinese case, I continue to believe the end result will be small.

It would be nice if this episode were a lesson to both sides that economic integration is an inevitable feature of the global economy, and total decoupling is a fantasy that would cause a lot of pain for both sides, but that is probably too much to hope for. At best, we will end up with another truce with modest commitments from both sides.

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