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SINGAPORE – With US-China relations at a historic low, President Joe Biden’s new administration is expected to keep the pressure on Beijing as it sets a new multilateral course in a rivalry that erupted into debilitating tech and trade wars during Donald Trump’s tenure.
While many businesses and investors hope for a trade policy reset, including clearer messaging and greater predictability after four erratic years under Trump, it’s not immediately clear Biden will be able to muster easily the “collective leverage” with traditional allies he seeks to coax Beijing to comply with better trade terms.
Trump’s “America First” trade departure drew a hard line against China’s state-led economic model and sought to lure more manufacturing jobs back to the US. The previous administration accused Beijing of stealing intellectual property and imposed tariffs on more than US$370 billion in Chinese goods in a sharp break with free-trade convention.
A bitter trade war was partially defused when the US and China signed a “phase one” trade agreement last January, which committed Beijing to increase its purchases of American products and services by at least $200 billion over two years. But despite that deal, America’s trade imbalance with China has worsened.
The phase one agreement also left in place 25% tariffs on $250 billion worth of Chinese industrial goods and components used by US manufacturers, costs for which economists say are mostly borne by US importers and consumers rather than Chinese producers. Beijing’s retaliatory levies on more than $100 billion in US goods are likewise still in place.
Other Trump-imposed tariffs remain in place, including on Chinese-made steel, aluminum, washing machines and solar panels, as well as goods from Japan and the European Union, allies that the Biden administration has vowed to consult before deciding on the future of US tariffs on Chinese goods in hope of establishing an alliance-based approach toward Beijing.
“Biden has talked about lining up other allies – the EU, Japan, and others – and yet he still has tariffs on the EU and tariffs on Japan,” said Blair Hall, senior advisor at SoHo Advisors, a corporate advisory firm based in Singapore. “There are a lot of awkward things that his administration is going to have to sort through before they can define their strategy.”
As a presidential candidate, Biden took aim at his predecessor’s handling of relations with China, accusing Trump’s administration of putting Washington on a weaker strategic footing. He said the phase one agreement was “failing badly” because it was “unenforceable” and “full of vague, weak, and recycled commitments from Beijing.”
Earlier in his decades-long political career as a senator and vice president under Barack Obama, Biden was an advocate for integrating China into the global trading system and voted to grant China permanent normal trading relations in 2000, paving the way for the world’s most populous nation’s entry into the World Trade Organization (WTO).
Biden’s views on China have since shifted, with the new president claiming that China has exploited the international system and vowing to more forcefully address its human rights violations and authoritarian ways. Significantly, both the Trump and Biden administrations have leveled identical complaints about perceived as unfair Chinese trade and economic practices.
Despite his criticism on the campaign trail, Biden’s policies on China are set to overlap significantly with Trump’s, even as their overall approaches differ. In December, the then-president-elect told the New York Times that he would not immediately cancel the phase one deal or take steps to remove tariffs on Chinese exports. “I’m not going to prejudice my options,” he said.
“The China tariffs are likely here to stay for the short and medium-term if not the long-term,” said Kelly Ann Shaw, a former deputy assistant to the president for international economic affairs who served as deputy director of the National Economic Council under the Trump administration.
“I don’t think that the Biden administration is going to be emotionally tied to the tariffs…but there doesn’t seem to be a real way to de-escalate that without meaningful quid pro quo on China’s side. And having been in those negotiations, it’s hard to see that happening in the short or medium term,” added Shaw, who is currently a partner at international law firm Hogan Lovells.
Janet Yellen, Biden’s US Treasury secretary, promised that the new administration would undertake a comprehensive review of all aspects of Trump’s trade policies toward China, as well Beijing’s implementation of the phase one agreement, in a statement responding to queries after her confirmation hearing last week.
She said the Democratic administration planned to pursue “a robust trade agenda”, but would prioritize domestic investments in workers and infrastructure before embarking on any new free trade agreements while adding Biden’s team would use a “full array of tools to counter China’s abusive economic practices and hold Beijing accountable.”
Observers see Biden’s nominee for US trade representative, Katherine Tai, as a shift toward a rules-oriented, technocratic approach to correcting problems in the US-China trade relationship, a departure from the unilateral, hardball tactics of former chief trade negotiator Robert Lighthizer, one of the Trump administration’s key ideologues.
Tai, an Asian-American of Chinese descent who speaks Mandarin, was the chief trade lawyer for the House Ways and Means Committee and headed China trade enforcement at the US Trade Representative’s office (USTR) from 2011 to 2014, where she successfully prosecuted several cases on Chinese trade practices at the WTO.
She also played a key role in negotiating stronger labor provisions with the Trump administration in the new US-Mexico-Canada (USMCA) trade deal. If confirmed, Tai will be responsible for enforcing US trade rules, imposing new tariffs or rescinding existing ones, and negotiating new trade agreements with China and other countries.
“If I were Katherine Tai, I would not be upset that those tariffs are in place because it actually gives you something to negotiate back from,” said Shaw. “You can extract some sort of concession, whether that is cooperation to address the core set of challenges or something else. There’s leverage there and the administration, if they’re smart, will use it.”
Analysts and trade specialists expect Biden to hold off on entering multilateral trade agreements shunned by the previous administration, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), particularly given the administration’s stated priority would be to tackle the nation’s spiraling Covid-19 crisis.
How Biden will proceed with the phase one trade agreement and other Trump-era restrictions imposed against Chinese businesses is less clear. The Trump administration had envisioned a more comprehensive “phase two” deal focused on forcing structural reforms of China’s state-owned enterprises (SOEs) and strengthening intellectual property protections.
Phase two negotiations never came to fruition as ties between the two nations deteriorated over the coronavirus pandemic. Moreover, China achieved just 58% of its 2020 purchase target of $173.1 billion, with total imports of covered products from the US totaling just $100 billion as of December 2020, according to US Census Bureau statistics.
At the same time, China’s trade surplus with the US surged to $316.91 billion in 2020 from $295.77 billion in 2019, amounting to a 14.9% jump from the $275.8 billion surplus China notched in 2017, the year Trump took office railing against Beijing’s trade practices and vowing to narrow large US trade deficits with countries like China.
While Biden isn’t likely to attach as much importance to the trade gap as his predecessor, his “Build Back Better” economic plan calls for investments in US industries and more resilient domestic supply chains, objectives that a phase two agreement could potentially be negotiated to promote if the new administration opts to build on Trump’s approach.
“I don’t know that this existing framework will provide the basis for the kind of agreements that the administration thinks it needs to come to with the Chinese government,” said Hall, a former deputy chief of mission at the US Embassy in Singapore. “I think it’s more likely that it is simply set aside for them to come up with a new comprehensive package.”
Analysts say China has lagged in meeting its phase one purchasing targets due to the earlier economic impacts of its Covid-19 lockdown. Trade experts have pointed to the phase one agreement’s force majeure clause that would free both parties from having to meet their obligations as a result of extraordinary events outside their control.
Reopening consultations on that basis could allow Biden’s administration to reset trade terms while also extending an opportunity to relax remaining levies in exchange for concessions on reform commitments or other areas such as cooperation on climate change and foreign policy issues involving North Korea.
Biden’s administration may also see good reason to stick to the phase one deal. China’s economy expanded by 2.3% in 2020, making it the only major economy to have grown last year, putting it in better stead to fulfill its purchasing commitments at a moment when the US economy is in a record-breaking pandemic-caused recession.
Agriculture is one of four areas where China had pledged to increase its purchases of US goods. Beijing bought over $23.5 billion in agricultural products in 2020, including record purchases of corn and soybeans that pushed up commodity prices and benefitted farmers. It also met at least 50 of 57 technical commitments in the phase one deal that aimed at lowering structural barriers to US imports.
US farmers received an estimated $46 billion in federal aid under the Trump administration, partly as compensation for losses incurred by his trade war. Though China achieved 64% of its $36.6 billion purchase target for US agricultural products in 2020, sustained buying could ease pressure on Biden to keep government bailout funds flowing.
“I think that agriculture is one of the reasons that the phase one deal with China is still intact,” said Shaw. “Agriculture will continue to play a key role in trade policy decisions that are taken by the Biden team because they have to. The sector has just been hit too hard and hurt too much, and certainly is an important part of the US economy.”
Whatever the administration’s decisions on trade with China, Biden’s advisers and Cabinet nominees have signaled a break with the pre-Trump trade consensus, where successive US governments touted globalization and sought to continually shrink trade barriers, and a new openness to using industrial policy tools to aid economic recovery.
“There’s a kind of recognition that ultimately the goal of international economic policy is not to make the world safe for multinational corporations to do business,” said Jeff Prescott, a Biden campaign policy adviser, in a news report. “It’s fundamentally about jobs in the United States, about the middle class at home and building our economy here.”
While Biden has made clear his intent to renew emphasis on multilateral diplomacy, particularly with the aim of building an effective coalition capable of pressuring China, the US’ ability to project global leadership on trade could diminish if the administration fails to forge a major new agreement with its key trading partners or eventually enter an existing pact like the CPTPP.
Even as the Trump administration sought to ratchet up pressure on China through export controls and sanctions, giving rise to a new Cold War atmosphere, Beijing has made recent significant trade strides by joining the Regional Comprehensive Economic Partnership (RCEP) in November and hammering out a landmark investment treaty with the EU in late December.
Both agreements deepen China’s commercial ties with Atlantic and Pacific nations that the new US president hopes to galvanize into a united front capable of pushing back against Beijing to check its rising power. That could give new impetus for the US to negotiate entry into the CPTPP, which includes 11 Pacific Rim nations but excludes China.
The CPTPP entered force in late 2018 absent Washington after Trump signed an executive order removing the US from an earlier version of the agreement, which had been one of Obama’s signature foreign policy initiatives, wherein the US sought an ambitious pact with smaller nations in Asia in a bid to write the rules for regional trade.
“This agreement had been toxic for the past four years,” said Shaw. “As we are beginning to fold our trade policy back in under the national security umbrella…there is more interest in looking at CPTPP as a way forward [to] address the threat from China. But there would have to be some major changes in the substantive provisions.”
The CPTPP is considered to be a more rigorous agreement than the larger RCEP pact because it includes labor and environmental provisions, as well as measures to circumscribe the role of SOEs and intellectual property protections that are less stringent than what the US had pushed when it negotiated the earlier Trans-Pacific Partnership (TPP).
In November, Chinese President Xi Jinping said China would “favorably consider” joining the CPTPP, which would require it to undertake the wide-reaching liberalizing requirements that go with membership. By acceding to the pact, potentially before Washington, the Biden administration’s trade alliance strategy would be significantly undercut.
“The US can’t self-isolate from the most dynamic economic region in the world. We have got to be part of that,” said Hall. “But, without some sort of revision to the CPTPP with respect to labor provisions, environment, and SOEs, it’s hard to see the US being able to accede. On the other hand, it’s hard to see China accede if those are in.”
With Trump having been the first US president to comprehensively challenge China, Biden could risk appearing weak if he reverses the previous administration’s hardline stances in pursuit of detente. Disagreements over trade, technology, Hong Kong, Xinjiang, Taiwan, and the South China Sea will all restrain quick improvement in US-China relations.
“Biden is going to have to come up with a sophisticated and multi-tiered strategy that does take on China in areas where it needs to be confronted, without creating a new Cold War,” Hall said. “If his team can wrap trade and industrial policy and tough measures, and justify them as containing or constraining China, it would probably get Republican support.”