A Chinese flag hangs between American flags in Chinatown in New York City.
Angela Weiss / AFP via Getty ImagesAbout the author: Christopher Smart is chief global strategist and head of the Barings Investment Institute, and is a former senior economic policy official at the U.S. Treasury and the White House.
However long the schedule allows for the first formal (albeit virtual) summit between Presidents Joe Biden and Xi Jinping, they will surely run out of time before they even begin to cover the issues entangling their two countries. Relations between Washington and Beijing have soured so quickly of late that progress on any single front looks immediately vulnerable to rapid unraveling on others.
Biden’s freshly minted China trade agenda, for example, opts for an incremental approach that builds on lessons of the last four administrations and lays out a path toward what U.S. Trade Representative Katherine Tai this week called “a future in which all of us in the global economy can grow and succeed.” Encouragingly, it sketches a more realistic intention to manage a difficult relationship rather than strike ephemeral new deals.
But progress will depend both on Chinese steps toward more-open and level domestic markets and America’s willingness to acknowledge any steps forward without moving the goalposts. Even with the best of intentions, the world’s largest bilateral economic relationship looks vulnerable to rising tensions around everything from Taiwan to the origins of Covid. Watch for more tariffs and sanctions. Plan for even more shifts in technology supply chains. Brace for escalating rhetoric and threats.
With tariffs still in place and an initial focus on the Trump administration’s phase-one agreement, sloppy headlines labeled the Biden approach as little new. It was remarkable, however, that in a week when the United States reported a record trade deficit with China (and everyone else), Tai made no mention of President Trump’s preferred benchmark for failing trade policy. Rather, she argued that success for American trade depends most on America investing in its infrastructure and its people, as well as close, if unspecified, cooperation with allies.
The new policy also claims to draw lessons from the mistakes of prior administrations. When China joined the World Trade Organization in 2001, Washington initially tried alternating carrots and sticks: policy dialogues to encourage reforms and 27 dispute settlement cases against Beijing at the WTO. The U.S. has won all of the cases that were decided, but as Tai put it “even when China changed the specific policies we challenged, it did not change the underlying policies. Meaningful reforms by China remained elusive.”
Trump’s more punitive and unilateral approach, slapping broad tariffs on Chinese imports and triggering Chinese retaliation in kind, yielded little better. The January 2020 agreement drew promises to purchase more U.S. goods, although these commitments lagged when the pandemic hit the following month. More important, in Tai’s words, the strategy “did not meaningfully address the fundamental concerns that we have with China’s trade practices and their harmful impacts on the U.S. economy.”
China has effectively accomplished the impossible, uniting Republicans and Democrats on a key element of national policy. They increasingly share a narrative that Beijing has delivered no meaningful reforms and has turned from potential partner to actual adversary.
But any foreign investor in China over the last two decades understands the picture is far more nuanced and includes substantial progress in some areas even as others have lagged or moved backward. Helpfully, the Atlantic Council just released a scorecard to measure improvements in China’s markets over the last decade compared to the United States and its allies.
Across six dimensions (financial system development, market competition, innovation, trade, direct investment, and portfolio investment), the study records distinct movement toward greater openness since 2010. In terms of supporting innovation with public and private cooperation, China rates close to Italy and Spain. China’s average tariffs on goods are now actually lower than America’s, having dropped rates with other partners when it retaliated against the Trump tariffs.
The study authors conclude this overall progress falls short of initial expectations when China was admitted to the WTO, but their effort to disentangle and measure key financial and economic policies highlights where progress is possible and where expectations look unrealistic.
China’s recent application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Asian agreement the U.S. designed, negotiated and then abandoned, might look like a cheeky response to Washington’s nuclear submarine sales to Australia. In fact, the bid highlights required reforms, including government subsidies, digital regulation and workers’ rights, that seem beyond the imagination of the current political leadership.
The new U.S. approach to China trade concentrates on “the dynamic of the relationship,” without pretending to remake China altogether. These more realistic goals require honestly differentiating steps forward from steps back. Unfortunately, they also need patience, trust, and persistence in an atmosphere where none is in great supply.
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