Trade May Still Be the Ballast in U.S.-China Relations—At Least for Now

Growing Tensions

Since Covid-19 deluged the United States, a barrage of U.S. hard-edged actions against China has hit, targeting concerns ranging from national security and technology to human rights and China’s territorial claims. We have seen sanctions related to Xinjiang and Hong Kong, a formal declaration of opposition to China’s maritime claims in the South China Sea, restrictions on Chinese state-owned media, tightening limits on Huawei technology, the removal of licenses for Chinese telecom giants, investigations and penalties for academics with ties to the Thousand Talents program, visa restrictions, possible bans on Chinese software, the closing of China’s Houston consulate, and bans on popular apps TikTok and WeChat. The tempo of new U.S. restrictions and ferocity of negative rhetoric are increasing.

Meanwhile, China has canceled U.S. press visas, closed an important U.S. consulate in China, blamed the United States for the protests in Hong Kong, and implemented a draconian national security law that hobbles Hong Kong’s democracy, all the while ramping up blunt, nationalist, and now anti-U.S. rhetoric.

But somehow, even as the policy fireworks explode on both sides, the Phase One trade deal, the centerpiece of U.S.-China commercial relations, is still being implemented. China has further opened its financial markets and is bringing down non-tariff barriers. How is this still possible? Are improving trade conditions in China for U.S. firms sustainable, or will trade fall victim to the broader hostilities?

Chinese Motives to Seek Trade Stability

There are several plausible reasons, some obvious and some perhaps less so, why both countries may be compartmentalizing trade relations, leaving them remarkably unaffected by the confrontations occurring on many other fronts.

On the China side of the equation, the policy changes required by the Phase One deal are good for their economy in the long term (and, many of them could be easily reversed if relations with the United States became terminally hostile). The purchases of U.S. goods and services are not harmful, even though the pandemic and major global price volatility have tempered demand.

China is working very hard to help its economy recover from Covid-19 and would not benefit from more economic disruption. To the contrary, it makes sense to try to keep global trade and investment, including from the United States, on a positive track. The Phase One deal is an important tool in this effort.

It is also useful for China to have some channel for pragmatic, nuanced discussion and joint progress with the United States. With U.S. Trade Representative (USTR) Robert Lighthizer and Chinese Vice Premier Liu He apparently having a relatively good rapport, trade talks seem to be one of a few open channels at this point.

On the political front, China promised this deal at a very high level: following through becomes a matter of face, not just vis-à-vis the United States, but in terms of the rest of China’s trading partners.

For Chinese leader Xi Jinping, it also seems possible that he has been playing on a larger chessboard. Perhaps he gave President Trump what Trump wanted on trade and thereby gained leeway to take action on other much higher-priority Chinese issues that were not so important to Trump. Former national security advisor John Bolton revealed in his recent memoir that Trump made private comments to Xi on Xinjiang and Hong Kong that gave Xi running room. Trump did remain remarkably quiet on the Hong Kong protests for months, and even now it is not Trump personally, but rather his proxies who are pushing more hard-edged actions and rhetoric. Trump even held a press conference on non-China issues in the middle of Secretary of State Mike Pompeo’s recent dark speech on China at the Nixon Library.

On a pragmatic level, many of the recent blunt actions taken by the United States call out known problems (such as intellectual property theft) or just mirror the restrictions China has imposed on the United States for years. These reciprocity-based actions could look to China as if the United States is just catching up to, or imitating Chinese policy in many respects, rather than delivering unexpected, serious blows to China’s regime. Media restrictions, limited market access for telecom and digital companies, policies that make clear some economic sectors pose national security issues all fall in the imitation category for China. Other actions by the United States may seem more symbolic rather than having practical impact.

Contrary to recent reports, China also may want Trump to win in November. If this is the case, keeping trade relations smooth and the Phase One trade deal going helps Trump’s U.S. agriculture base and buoys the U.S. stock market. Note, too, the other side of this coin—these circumstances also give China leverage that may keep the Trump administration from taking measures that go too far, since truly outraging China could blow up the Phase One deal and trade progress with the risk of major damage to both U.S. markets and farmers.

Last, China may see value in trying to reestablish the commercial sector as the stabilizing ballast for the China relationship with the United States regardless of the outcome of November’s election. The Phase One trade deal is a concrete way to create more optimism among foreign firms. Given the huge attraction of China’s market for business across the globe, China can anticipate that this strategy should bear fruit.

Trump’s Calculus

On the United States’ side of the ledger, the upcoming election seems relevant for many of the same reasons it could be relevant to China. President Trump may be giving China hawks more space to take action because Trump is personally outraged at how Covid-19 has harmed the U.S. economy, the foundation stone for his reelection, and he may see election value to using China as a scapegoat. However, given the value of the Phase One trade deal to buoy U.S. financial markets and generate more exports of agricultural goods, which come mainly from “red” states, it seems plausible that Trump will still insist on practicing some restraint, including not abandoning the Phase One deal and keeping trade relations moving forward in order to protect those interests—at least through the election. For the same reasons, Trump may be shying away from major financial restrictions on China (such as de-listing Chinese companies from U.S. stock exchanges) and may be limiting U.S. commercial constraints on China to sensitive technology and other national security-linked sectors of the economy.

In this vein, it seems telling that the FBI director Christopher Wray’s recent China speech concluded with this statement: “Confronting this threat effectively does not mean we shouldn’t do business with the Chinese. It does not mean we shouldn’t host Chinese visitors. It does not mean we shouldn’t welcome Chinese students or coexist with China on the world stage.”

Trump also personally has been invested in getting China to buy more U.S. goods—and this is happening due to the trade deal even with the economic slowdown. The Phase One deal puts a great amount of pressure on China to maximize those purchases. Trump would like to keep that leverage.

For USTR and American industry, on policy matters, the deal offers real, even if incremental, progress on long-standing, significant market access barriers and other problems across many sectors in China. Massive agriculture product barriers have been ripped down, financial services market access is happening, and legal changes to intellectual property are underway that could be very helpful. Despite its aggressive foreign policy and tightening domestic political climate, China is making the most market opening progress it has in years in multiple economic sectors.

It is also important to show U.S. strength in enforcing China’s commitments to get everything won through the trade deal. If the administration lets the Phase One deal die, it becomes difficult to justify the pain caused by the lengthy trade war. Trump could be painted as a dealmaking failure. And the Phase One trade deal is not a heavy lift for the United States in terms of meeting any obligations under the deal, so there is no need for a complex cost-benefit analysis on that score.

Finally, a consideration for those looking ahead could be the fact that progress on trade through the Phase One deal offers a possible door to more negotiations on other outstanding issues in a “Phase Two,” such as subsidies and government procurement. There are not many other doors visible right now for making constructive progress together with China on any issues going forward. The Phase One deal has value here.

The Eye of the Hurricane?

U.S. and China policy actions are buffeting U.S.-China relations right now, with gale force dangers from every side. But despite the hurricane threatening to engulf the relationship, there are indicators that the trade side of the relationship could remain in the calmer eye of any hurricane at least through the end of 2020.

Claire Reade is a senior associate (non-resident) with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Claire Reade
Senior Associate (Non-resident), Trustee Chair in Chinese Business and Economics