The stalemate in U.S.-China economic talks: turning a corner or going around in circles?
By Scott Kennedy | August 3, 2017 on CSIS.org
The first U.S.-China Comprehensive Economic Dialogue (CED), held on July 19 in Washington, D.C., was slated to be the moment at which the United States finally turned the corner in bilateral negotiations with China over the economic relationship. Washington was no longer going to accept token concessions from Beijing on minor issues, as many have charged was the regular and frustrating result of previous talks, namely the Strategic Economic Dialogue (SED) held under the Bush administration and its successor, the Strategic & Economic Dialogue (S&ED), carried out under the Obama administration. Instead, the new U.S. strategy is meant to force China to make substantial concessions on core problems that are the product of Chinese industrial policy, such as overcapacity in steel and China’s discriminatory push into high technology.
Despite the change in tack, China did not bend to the United States’ will. Beijing wouldn’t move enough on key issues, particularly on steel. As a result, the United States cancelled plans to issue a joint statement and hold a press conference, declaring with its silence that the relationship is in trouble. As one U.S. official put it, “We weren’t going to put lipstick on a pig.” China issued its own alternative, more positive assessment (here), but it is now difficult to know where things exactly stand. The biggest question is whether the CED represents the first step in a difficult process of rebalancing the bilateral relationship in a more equitable direction, or whether it is likely to yield no more, and perhaps even less, progress than earlier approaches.
The Economic Stakes
The U.S.-China economic relationship is massive: $650 billion in trade in goods and services in 2016, almost $300 billion in cumulative two-way direct investment since 1990, and growing financial ties through securities markets and foreign exchange holdings. These numbers still do not do justice to how intertwined the two countries are through global supply chains, corporate partnerships, and people-to-people ties. By one estimate, our economic engagement supports 2.6 million U.S. jobs.
Yet despite the many benefits for both countries, the relationship has become unbalanced, as China has used every tool at its disposal, fair and unfair, to move up the value-added chain and take over market share from foreign competitors. U.S. exporters and investors are facing growing obstacles not only in China, but also in third markets and even in the United States. Although there is disagreement over whether Chinese unfair practices are the primary cause of the bilateral trade deficit or has led to major job losses, it is clear that some Chinese practices are depriving U.S. companies of substantial opportunities and putting at risk business models built on competitive innovation and tight budget constraints. The United States’ problems with China are far from unique, as industry from Europe and East Asia face similar obstacles. Having China liberalize is not just a U.S. concern, but a global one.
The Trump Administration’s New Roadmap
The Trump administration has made it a key goal of its trade policy to arrest these trends and put the relationship on a fairer path. Its view is that the U.S. commitment to patiently integrating China into a rules-based system and sustained dialogue, via the SED and S&ED (as well as the Joint Committee on Commerce and Trade (JCCT)), may have addressed some minor irritants, but it also removed any fears Beijing had of ever facing severe repercussions for its mercantilist behavior. Hence, in principle, the Trump administration has sought to change its approach toward bilateral dialogue in five ways:
- Limit the discussion to only the most important issues and pursue specific commitments that are measured in commercial results achieved in the near term. The S&ED ballooned to include hundreds of topics; essentially anything that was not easily addressed through regular bureaucratic channels made it onto the agenda. The Trump administration decided it should narrow things down to the highest priorities.
- Consistently raise the bar on what is acceptable performance by China, from strict legal compliance with its multilateral and bilateral commitments to a broader sense of fairness that encompasses both (a) expecting China to treat U.S. exports and investors as well as the United States treats their Chinese counterparts (so-called reciprocity); and (b) restraining Chinese industrial policies that may be legal in a narrow sense but still result in negative externalities for other economies.
- Reduce the number of voices at the table so that negotiations would be more focused. The S&ED featured most cabinet-level agencies in both governments and a long list of affiliated dialogues. In 2016, over 1,000 Americans traveled to Beijing for the S&ED. The presence of so many staffers and outside experts reflected how nonstrategic the conversation had become.
- Be ready to walk away if offered only modest concessions. All previous rounds of the SED and S&ED concluded with lists of areas of progress and agreement. Areas of deadlock were papered over or minimized so that the two sides could argue to their own constituencies that progress was being made and that the process of patient engagement should continue.
- Raise the possibility that the failure to reach agreement through negotiations would result in penalties against Chinese economic interests. U.S. actions would not be limited to standard World Trade Organization (WTO) or trade remedy cases but would potentially involve unilateral steps — tariffs, quotas, outright bans — drawing on the rich variety of U.S. trade laws that could be quickly acted upon to demonstrate the dangers of not reaching more equitable deals.
Implementing This New Strategy
The administration has not consistently pursued this approach, but it does appear this is the direction it has been headed by fits and starts over the past few months. True to this strategy, the first CED, held on July 19, featured a far smaller list of topics and participants on each side, and the clear purpose going in was to reach deals on specific areas of concern. There was a general session that covered the most central issues, led on the U.S. side by Commerce Secretary Wilbur Ross and Treasury Secretary Steve Mnuchin** and on the Chinese side by Vice Premier Wang Yang. There were also a series of smaller breakout sessions on some important topics, such as macroeconomic policy and finance, trade and investment, and agriculture. The trade and investment session touched on overcapacity in steel and aluminum, as well as high-tech trade.
The meeting ended in a stalemate with no progress on any major issue. The key sticking point appears to have been Chinese steel. Although China recognized that excess capacity is a problem in part caused by Chinese policies, it reportedly was unwilling to commit to reducing overcapacity by a large enough amount in a short enough timespan. According to one person privy to the day’s discussions, China only offered “crumbs,” which the United States was not going to accept. Consistent with the new U.S. strategy, the Trump administration would not characterize the talks as successful. Although Secretary Mnuchin tried to put a good face on the talks in an interview with the Financial Times, saying that China had “heard…the marching orders” the U.S. side received from President Trump, in a joint statement, he and Secretary Ross would only allow that “China acknowledged our shared objective to reduce the trade deficit which both sides will work cooperatively to achieve.”
The Chinese side put a more positive spin on the talks, noting that, “The two sides have deepened mutual understanding, increased mutual trust, fully completed the tasks of the inaugural CED, and created a successful working model for future CEDs.” Yet it was unable to identify any specific agreements. China apparently did make some specific pledges regarding opening its rice market, which could be a boon to U.S. exports, but there are still technical details to resolve.
In the wake of the talks, we are beginning to see the final component of the U.S. strategy: the possibility of unilateral action if China does not change its policies through dialogue. Although the administration has lowered expectations about using Section 232 of the Trade Expansion Act of 1962 in the near future to limit steel imports for national security reasons, there are reports that the administration will take steps under Section 301 of the Trade Act of 1974 to investigate Chinese trade practices and treatment of foreign investment, launch more antidumping and countervailing duty cases, and more vigorously review Chinese acquisitions of U.S. companies.
This final turn is a natural product of the new strategy and from a narrow perspective makes complete sense. The United States put forward what it believed to be major yet reasonable demands, and China did not meet them. So rather than accept failure and continue talking for talking’s sake, the United States now wants to send a clear message.
Why the Stalemate?
Although greater tensions now seem likely, it is not self-evident why this outcome at the CED was the result. There are several competing narratives. One is that the Trump administration wanted the talks to fail in order to justify moving in a more hardline direction. The administration may have initially signaled it would accept a more limited outcome but somewhere along the way “moved the goalposts” further back and set forth demands that were intentionally unacceptable. This story is tempting given the presence in the administration of some true hardliners skeptical of negotiating with China, such as Steve Bannon and Peter Navarro, but there is no clear evidence of such a plan.
That said, a more persuasive case can be made for a misalignment in expectations between the United States and China about the purpose of the CED. Beijing may have believed that the CED would be oriented toward strategic dialogue on structural issues and that any specific commitments would be incremental and require an extended period to be implemented. They could have gotten this impression from the chummy atmosphere on display at the Mar-a-Lago summit, the U.S. acceptance of very modest tangible deliverables from the 100-day work plan (some of which China had previously pledged), and the fact that the CED was defined as the successor to the S&ED and SED, where dialogue had been seen as useful in and of itself. By contrast, the United States could have been under the impression that the momentum gained through modest achievements in the 100-day negotiations should be followed by much larger substantive concessions by China in the CED and that vague expressions of goodwill and sincerity alone would not be acceptable.
What is still unclear is whether this misalignment in expectations was the result of insufficient communication between the two sides in the weeks between Mar-a-Lago and the CED, or if the misalignment was the product of entrenched differences, with the two sides dug in despite the awareness that a deadlock would eventually emerge and set the stage for greater tensions. These explanations are not mutually exclusive. The Trump administration is still in the midst of developing overall approaches to China and the global economy, the bureaucracy is still far from fully staffed, and there is incomplete communication within departments, let alone between them. It’s certainly possible the members of the U.S. team were not on the same page going into the CED. All of this could have contributed to weak signaling between the United States and China and made it harder for either side to fully appreciate the pros and cons of sticking to their positions.
Turning a Corner or Going Around in Circles?
The CED process may continue on at the working level, but it appears we are on the cusp of shifting to a different stage in the relationship — where unilateral action by Washington and countermeasures by Beijing will drive the agenda. It is possible that these steps will generate sufficient pressure to bring both sides back to the negotiating table to find a deal more consistent with the higher bar the Trump administration has set as part of its new approach. However, it is equally possible that China will retaliate forcefully and that we will spiral into a broader trade war. This is made more likely by the struggles between China and the United States to find common ground on how to manage the North Korea problem.
To avoid an unproductive conflict that does not simply worsen our respective economies and the overall relationship, the United States will need to step up its game. It is incumbent on the Trump administration to develop more comprehensive policies for China and the broader Asia-Pacific region, so that there is a clear understanding of where its economic agenda fits within the broader context of the relationship. Fully staffing the relevant executive branch agencies and developing strong communication channels within and between individual departments will be critical for better execution. Finally, the United States would have a greater chance of addressing these issues with China if it prioritized the China challenge and put aside, at least for the time being, less urgent disagreements on trade with China’s neighbors and our European allies. Speaking with a common voice would clarify that these issues are of global concern and mean that continued discord would leave China isolated, not the United States.
Scott Kennedy is deputy director of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy 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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