US-China relations: We can work it out

In the spirit of this iconic Beatles song, our members believe it’s better to work it out than to slug it out. Nationalistic media diatribes and tit-for-tat punishments are bad for everyone. The US-China Business Council, a trade group of American companies that do business with China, eschews the term “trade war,” because we find it inaccurate to describe what’s occurring, unhelpfully provocative, and likely to desensitize people of otherwise goodwill to the very real possibility of worse conflicts to come. In this spirit and context, we’re cautiously optimistic about the G20 outcome and prospects for resolving at least some of the core issues.

It is high time negotiators get back to work and hopefully finish a trade agreement that has been coming together in fits and starts for months. It’s better to be talking than not talking—and there’s a lot of talking and compromising to do.

At the same time, we’re under no illusions that an agreement will be easy, or that an agreement will be anything but a necessary first step in trying to manage a relationship that’s likely to be contentious and problematic for many years to come. We are in a new unchartered era, and new tools and focus are needed to avoid serious damage to the world economy; missed opportunities to improve that economy; and even greater undesirable outcomes involving national security, competition around new technologies, decoupling government ties and economic systems, and more. Our business members, many of whom have been in China for decades, say they are increasingly pessimistic about the current state of the relationship. At the same time business for these companies remains robust, at least for now. These and other US businesses need to be in China to remain globally competitive and China needs them to stay and to prosper.

What US businesses want

US businesses are aware of these meta issues, but are more concerned about resolving the basic fair play issues captured in the Section 301 investigation concerning China’s trade practices. The investigation report, which is worth reading, provided the justification for the initial round of punitive tariffs and informed US demands during the negotiations. Our members oppose the tariffs, want them lifted and not re-imposed if the Trump administration concludes the Chinese have not met all terms and conditions of an agreement.

The demands include improved intellectual property protections; increased market access that opens more sectors of the economy; fewer subsidies for state-owned enterprises (SOEs); and other steps necessary to put foreign companies on an equal footing with their domestic counterparts so that competition is fair, consumer choices are optimized, and innovation can thrive.

As has been extensively reported in the media, China appears to have substantially agreed with most of the demands for change, then backtracked on some key ones including treatment of SOEs and how to codify the changes so that they genuinely happen in measurable and enforceable ways. During the negotiations and in the aftermath of talks breaking down, positions hardened, perhaps making an eventual agreement more difficult to achieve. President Trump is under fire for his reported willingness to bargain away US demands for structural reforms in China for a few billion soybeans, and to keep farm state voters in his camp for re-election purposes. President Xi was reminded by hawks in his inner circle that there’s a political price to be paid for appearing weak in response to alleged American bullying. China then announced its three principles for resuming negotiations including treating the other party with “mutual respect.” US negotiators and businesses want an agreement that is timebound and verifiable. Are these goals compatible?

Why we need a deal

Mutual respect sounds good, or at least innocuous, unless it is translated as: “A lack of respect is any demand or request you make that I don’t want to agree to.” If that’s afoot, the negotiations will end not in mutual respect but in acrimonious mutual finger pointing, more tariffs on more goods, more blacklists and continued unravelling of the relationship. GDP will suffer, foreign direct investment will flatline, some US companies may leave China, supply chains will reconstruct out of China, cultural exchanges will cease. A slow-motion decoupling will ensue. A victory perhaps for hawks in both countries, but not for pragmatic businesspeople who seek a floor under a sinking relationship and no ceiling over mutual benefits that a relationship based on real, reciprocal respect could produce. If factions within and outside the Trump administration succeed in convincing China’s middle class and private sector that the aim of US policy is to thwart China’s rise, decoupling is the likely result. Yet, in survey after survey the view of American businesses that continue to make money selling to Chinese consumers is that they know they need to be in China for the long haul but that China needs to accelerate economic reform. How these realities can continue to coexist is not knowable, and the G20 meeting did not provide a clear way forward.

Examining the tea leaves steeping after the G20 reveals more muddle than clarity. Contrary to what Trump said directly after the meeting, there’s confusion about what if any agricultural products China agreed to purchase. Huawei was reportedly discussed, but the US government agencies responsible for blacklists have not yet issued guidance on exactly what US companies can sell to Huawei. Two weeks after the leaders met, there was no timetable for resuming talks, nor do we know on what issues they will focus first. Whatever they are, the negotiators have hopefully learned from earlier talks about the flawed presuppositions they made during the first round. Former US trade negotiator Wendy Cutler, who we interviewed after the G20 meeting, finds that collaborative learning is an important though little appreciated factor in the ultimate progress of this and other high-level trade negotiations of the past.

Life is short

We are at this troubled crossroads for a variety of reasons, but most fundamentally, we are here because China has not yet fulfilled major promises to reform and open its market, including promises that its leaders continue to make.

Ironically, completing these reforms is objectively in China’s best interests, including aiding its long-suffering private sector—the biggest source of job creation and innovation, now and in the future. Completing these reforms will not be a sign of weakness. Rather, it will increase China’s standing in the eyes of world public opinion at the same time it seeks to play a bigger role in world affairs.

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