A generation later, most of that sentiment has vanished. Instead of growing closer, the United States and China have moved apart. China’s economy has grown stronger, and a sense of strategic rivalry has cast a pall over relations. Now, as the two countries wrestle over new trade commitments, the longtime framework is crumbling.
Both countries have taken unexpected turns under leaders who seek to make their nations great again. Since taking power in 2012, Chinese President Xi Jinping has bolstered the role of state-owned enterprises and intensified Beijing’s suppression of dissent. Meanwhile, President Trump has brushed aside WTO rules and shown no interest in political reform in China.
On Friday, the Trump administration unleashed a 25 percent tariff on $50 billion in Chinese imports. And Trump said, “The United States will pursue additional tariffs if China engages in retaliatory measures.”
“We started this economic engagement with China on the assumption that China would become a responsible stakeholder, as people used to say in the Bush administration, and that it would liberalize politically,” said Aaron Friedberg, a professor of politics and international affairs at Princeton University and former deputy assistant for national security under Vice President Richard B. Cheney. “Whatever doubts we had about trade negotiations paled next to those larger aims.”
But, he added, instead of complying with the world order, China wants to change it and is now seen as “a strategic competitor and ideological rival.”
How that shift will shape the outcome of U.S.-China trade talks remains unclear. Policy experts and business executives across the political spectrum applaud confronting China on trade, but few believe Trump can follow through.
After brandishing direct tariffs, Trump appears ready to accept pledges by China to buy more U.S. energy and agricultural products, thus falling back on managed trade instead of promoting free trade.
“That’s not opening markets,” said Kenneth Lieberthal, a China expert and former director for Asia at the National Security Council. “That’s deciding who is going to buy what.”
A deal like that would also bolster U.S. commodity exports, characteristic of developing countries, rather than emphasizing finished goods, technology and services.
Moreover, economists warn that by cutting taxes and driving up fiscal deficits, Trump has started a chain reaction that will increase the overall U.S. trade deficit — no matter what sort of bilateral deal Commerce Secretary Wilbur Ross brings home from his shopping trips to Beijing.
Trump has an opportunity, some analysts say. He has the attention of foreign leaders, and they are eager to resolve trade issues. But few analysts think he is agile enough or even inclined to pivot toward a constructive, obtainable agreement.
“I would argue that Trump is right to be concerned about global imbalances,” said Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management. “The problem is his administration’s failure to understand that they are driven by capital imbalances, and they are trying to solve the problem with tariffs.”
And noting that politicians across the political spectrum share Trump’s concerns, Pettis said: “We shouldn’t pretend this trade thing is just a Trump thing. It’s going to continue long after he’s gone.”
Economics vs. politics
U.S. trade with modern China began in earnest in the 1990s, when Deng Xiaoping opened his country to the global economy. Despite lingering U.S. opposition to a trade deal after the 1989 crackdown on pro-democracy protesters in Tiananmen Square, the Clinton administration backed China’s most-favored nation status and brought it into the WTO.
The results have exceeded everyone’s expectations: Total trade volume was $635 billion in 2017, up from $33 billion in 1992.
Clinton’s Commerce Secretary Ron Brown tried to link trade and human rights. “History seems to teach us that as there is more interaction with outsiders, as there is more economic development, communication and progress . . . human rights progress is often directly correlated to economic progress,” Brown said in an interview with The Washington Post during a 1994 visit to Beijing.
But Clinton trade negotiators tried to keep the economy and politics on separate tracks. President George W. Bush initially took aim at China, but the Sept. 11, 2001, attacks deflected his focus from China, whose help Bush then sought in his war against terrorism.
The Obama administration dealt with China on the two-track model. It sought to clamp down on cyberintrusion and persuaded Beijing to close some of the steel mills and aluminum smelters that were flooding global markets. It brought 16 cases to the WTO and won them all. The administration separately pursued its largely futile talks on China’s military expansion in the South China Sea, Chinese illicit trade with North Korea and cooperation on Iran.
Trump, by comparison, has connected the arenas, potentially giving China leverage over the U.S. trade negotiators. For example, Beijing can offer modest trade concessions in return for pledges to support ongoing talks between Trump and North Korea’s Kim Jong Un.
“For various reasons, maybe including trade,” Trump told reporters last month, “President Xi could be influencing Kim Jong Un.”
A couple of weeks earlier, Trump praised Xi’s efforts on North Korea: “He is a good man. He is a very good man, and I got to know him very well.”
Xi’s influence, however, hasn’t been positive in the eyes of China experts and trade negotiators.
When Xi came to power in 2012, economic reforms had pared back the role of state-owned enterprises, which generally receive cheap credit and other subsidies. With the Communist Party’s 60-point paper on “deepening reform,” it seemed Xi would continue them. “The underlying issue is how to strike a balance between the role of the government and that of the market and let the market play the decisive role in allocating resources,” the Central Committee said.
But Xi has tilted the balance toward the state. The year before Xi’s elevation, more than half of Chinese bank loans went to private firms; by 2015, that fell to 19 percent. Loans to state-owned enterprises, by comparison, more than doubled, to 69 percent, according to Nicholas Lardy, a China expert at the Peterson Institute for International Economics.
“For the first decade after China’s accession to the WTO, it did lead to a more market-driven economy,” Lardy said. “The private sector became the dominant source of growth and employment and also a major source of exports. Where things started going off the track was when Xi Jinping became party general secretary and president. He was very strong on the importance of state-owned enterprises, saying they had to be the backbone of the economy.”
Though the private sector produces three-quarters of China’s gross domestic product, its share of output, investment and bank loans is falling, Lardy said, adding that “the idea that [the government is] going to let competition continue to shrink the state sector is out the door.”
Instead, Xi has launched his Made in China 2025 campaign to rely on “indigenous innovations” and “self-sufficiency.” The plan sets a goal of making 70 percent of basic core components and important basic materials in China.
The phone company ZTE, despite its current reliance on U.S. technology, was to be one of the new national champions. But Trump cut off ZTE’s access to U.S. technology because of its violations of sanctions, temporarily putting the company out of business. He showed that the United States still has leverage.
Yet Trump has relented after China’s protests. ZTE will pay a steep fine and then be allowed to operate again. Disappointed U.S. policy experts worried about national security say that the lesson for China will be to hurry and develop (or pilfer) technology to make ZTE more independent.
“If ZTE is any indication, we might settle for face-saving measures,” Friedberg said. “China might buy this and that . . . more soybeans, whatever. But that would not address structural problems. That would leave the problem unresolved.”
Even if an agreement is forged soon, trade issues will remain nettlesome. Former trade negotiators lament how “excruciating” it was to get China’s team to move on even incremental changes.
After two years negotiating about environmental products, trade officials thought they were down to the last meeting to finalize a deal in December 2016. China, both a consumer and producer of solar panels and wind turbines, would have benefited from the agreement.
It would have left in place European tariffs on Chinese bicycles and protected Polish and Hungarian manufacturers.
At the last minute, however, Chinese negotiators unveiled a new proposal seeking full access for Chinese bicycle makers to the European market. The deal also failed to address key U.S. issues about wind turbines. The proposal was a non-starter. To the Americans, it seemed that Chinese negotiators had received orders from senior party leaders.
To many of Trump’s advisers, this sort of snag shows what’s wrong with past trade deals. “It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime,” the U.S. Trade Representative’s Office said in its latest annual report to Congress on China’s compliance with the WTO.
Yet a Trump administration deal that would provide for China to buy more of certain U.S. goods won’t solve the underlying problems such as intellectual property theft or even the trade deficit itself.
“China has become a big enough economy that it in fact has a huge economic footprint well beyond China’s borders,” Lieberthal said. “There’s concern that if China is not joining the world in the move toward free trade and playing by the rules, then that is very damaging to the entire system.”