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Despite pause in trade war, U.S. and China’s economic relationship is forever changed

President Trump and Chinese President Xi Jinping met in Buenos Aires on Dec. 1, 2018. Trump called the two leaders' relationship "very special." (Video: The Washington Post)

BUENOS AIRES — The trade talks that President Trump and Chinese President Xi Jinping launched this weekend have raised hopes for a peaceful resolution of the trans-Pacific tariff war — but the economic relationship between the U.S. and China has been permanently altered.

Over dinner following the Group of 20 summit Saturday, Trump agreed to cancel a planned Jan. 1 tariff increase in return for increased Chinese purchases of American farm and industrial goods.

The two sides also will commence talks about “structural changes” in Chinese practices, including forced technology transfer, trade secrets theft, and non-tariff barriers. The goal is to secure an agreement in 90 days.

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“Markets should be happy, in that the worst is postponed. But I don’t see the West ever going back to business as usual with China. Too many genies have been let out of bottles,” said Fraser Howie, author of “Red Capitalism,” a book about China’s financial rise, in an email.

Over the past quarter century, American manufacturers grew dependent upon low-wage Chinese workers to produce iPhones, clothing and industrial parts, often at the expense of factory employees in the industrial heartland.

China, in turn, invested more than $140 billion in the U.S. since 2000, according to the Rhodium Group, further knitting together two economies that account for roughly 40 percent of global output.

But almost a year of heated U.S. rhetoric, escalating tariffs and tighter investment and export controls have shaken Chinese government officials and global business executives.

In the game of "Trade Wars," perhaps the winning move is not to play. (Video: Daron Taylor, Jhaan Elker/The Washington Post)

As repeated tariff salvos prompt companies to rethink their reliance upon Chinese factories, Beijing is stepping up efforts to wean itself from what it sees as an unpredictable American partner, according to trade analysts, business executives and former government officials.

“Both sides have set in motion policies that won’t be up for negotiation. So it’s not realistic to expect a return to the status quo,” said Wendy Cutler, a former U.S. trade negotiator now with Akin Gump via email. “We are in a new world.”

A great deal has changed between Washington and Beijing in the almost two years since Trump began implementing his “America First” trade policy overhauland it cannot readily be unwound.

The president’s abrupt return to brinkmanship over a new North American trade deal, which he signed Friday along with leaders of Mexico and Canada, underscored U.S. unpredictability.

Lawmakers wary of Trump’s threat to cancel NAFTA

Returning to Washington, Trump told reporters aboard Air Force One that he will withdraw the U.S. from the existing North American Free Trade Agreement (NAFTA) to present Congress with an all-or-nothing vote on the new pact.

“I’ll be terminating it within a relatively short period of time,” he said. “It’s been a disaster for the United States. It’s caused us tremendous amounts of unemployment and loss and company loss and everything else.”

Many analysts are skeptical that China will make fundamental changes to its state-led economic system in the 90-day talks. But even if it does, and the U.S. tariffs are lifted, the other impediments to free-flowing goods and capital will remain.

Trump has resorted to tariffs more freely than any American leader since the 1930s and his harder line on China extends well beyond import taxes. The U.S. is restricting Chinese investments in Silicon Valley, planning new limits on exports of advanced technology products, rethinking student and scientific visas and accusing China of “economic aggression.”

Trump’s imposition of tariffs on more than $250 billion in Chinese goods already has prompted China to retaliate by buying soybeans from Brazil rather than Indiana or Iowa.

The president’s handling of ZTE, a state-owned telecommunications firm that violated U.S. sanctions on Iran and North Korea, spurred Xi to accelerate plans for China to become self-sufficient in technology.

In a watershed moment, the Commerce Department earlier this year banned U.S. companies from selling to ZTE, a crown jewel of China’s technology industry, after it was caught violating the terms of an earlier settlement of criminal and civil charges related to illicit sales to Iran and North Korea.

The order would have put the company, which employs roughly 75,000 workers, out of business. After an extraordinary personal plea from Xi, Trump agreed to relax the “death penalty” and allow U.S. companies to resume shipments.

But the incident — and Trump’s 2017 decision to veto the sale of Lattice Semiconductor to a China-backed buyer — fueled Beijing’s desire to develop domestic sources for critical products.

Xi has personally directed a campaign to promote “self-reliance,” with public tours of China’s modern industries in the south and its traditional Rust Belt region in the northeast.

“The turn away from reliance on the U.S. for agricultural and industrial inputs will accelerate,” Charles W. Freeman Jr., a former U.S. diplomat said in an email. “U.S. companies in China will hedge by continuing to move some of their facilities to Vietnam and other lower labor cost economies.”

The Commerce Department last month also began drafting regulations to limit exports of advanced technologies, including robotics, biotechnology, artificial intelligence and quantum computing.

The measure, which echoes Cold War-era limits on dealings with the former Soviet bloc countries, aims to safeguard national security and U.S. technological leadership, according to a Federal Register notice seeking comments on the proposal.

“In previous trade talks, China has insisted on the U.S. responding to its requests, as well, including looser export controls and a more lax investment regime. The U.S. is moving in the totally opposite direction vis a vis China, and unlike tariffs, these new regulations will not be up for give and take,” said Cutler.

The new export controls are fueled by concerns that China is trying to steal or buy American technology to help it leapfrog Silicon Valley. Begun in 2015, the “made-in-China 2025” program of subsidies for domestic companies in 10 technology sectors is aimed at displacing U.S. companies as world leaders, the administration says.

The administration is struggling to balance worries about aiding a state-directed economy’s rise and U.S. corporate demands to share in the wealth generated there.

“China’s innovation community and high-tech community is thriving. It’s well-financed and very global,” said Craig Allen, the president of the U.S.-China Business Council. “Many of our members want to have a role in that, sell into that, partner with Chinese companies.”

U.S. officials argue their demands for greater market access for foreign companies would benefit Chinese consumers. But administration complaints over China’s state subsidies for technology companies and limits on foreign ownership of joint ventures threaten Beijing’s economic model.

“Trump’s problem is that he has demanded the structural transformation of the Chinese economy into something that works more like the U.S. economy and his administration has defined China as our economic and military enemy,” said William Overholt, a senior fellow at the Harvard University Asia Center. “The demand is nonnegotiable and everyone in both the U.S. and China knows it.”

China could move quickly to pick up stalled negotiations for a treaty that would encourage investment by granting foreign and domestic firms equal treatment, according to Jeff Moon, a former trade negotiator in the Obama administration.

“The two sides have discussed these industrial issues for years in other contexts, and substantive discussions can ramp up quickly if we stop pretending that these are new issues that have never been addressed before,” Moon said, adding that China also could rethink its limits on foreign ownership of joint ventures.

Major business groups applauded the Trump-Xi deal for defusing the immediate threat of higher tariffs, which they said would have raised prices for consumers, narrowed profit margins and disrupted supply chains.

Matthew Shay, president of the National Retail Federation, said he hoped the deal would lead to the elimination of all U.S.-China tariffs.

Dean Garfield, president of the Information Technology Industry Council, echoed the call for a tariff rollback.

That might happen one day. But for China and the U.S., there’s no going back to the world before Trump.

“Even if the tariff war recedes, the broader economic and political environment has shifted against giving China the benefit of the doubt as it develops, and there is no turning back the clock,” said Claire Reade, a former U.S. trade negotiator now with Arnold & Porter, via email. “The major global issues created by China’s size combined with its distortive industrial policies are now out in the open.”