On December 10 President Trump announced that the United States, Mexico, and Canada had successfully negotiated a new regional trade accord, the U.S. Mexico Canada Agreement (USMCA). Three weeks later Trump indicated that the United States and China had agreed on a “phenomenal” “phase one” trade deal on January 15 and that he would travel to Beijing later in the year to commence negotiations on a “phase two.” What do these developments portend for the future of the Sino-American relationship?
Notwithstanding U.S. Trade Representative Robert Lighthizer’s implausible claim that its signing was “probably the most momentous day in trade history ever,” the USMCA represents in most respects continuity with its predecessor, the North American Free Trade Agreement (NAFTA) which Trump called during his presidential campaign-- with greater plausibility-- “perhaps the worst trade deal ever made.”
The USMCA contains new language that will reduce the sovereignty of the U.S.’s regional neighbors and increase U.S. strategic economic depth. Canada and Mexico are effectively prohibited from signing bilateral trade agreements with “non-market” economies, thereby preventing China from using these countries as a “back door” to export goods tariff-free to the United States. The USMCA thus becomes a template for future “America First” trade negotiations with the EU, Japan, and India that could potentially isolate China.
By contrast with the USMCA, the U.S.-China phase one agreement is very limited and insubstantial, representing little more than a ceasefire in the escalating struggle for global hegemony. Neither side made significant concessions. The United States suspended tariffs on $156b of Chinese goods that were to have been imposed in December, a measure that would have extended tariffs to virtually all of China’s exports. The 15% tariff on $110 billion of Chinese goods that had been imposed in September was halved. But 25% tariffs on $250 billion of China’s exports remain and there is disagreement on whether the United States has agreed gradually to remove remaining tariffs. China agreed to increase imports from the United States—most notably food and energy-- and made vague commitments with respect to the protection of intellectual property, financial liberalization, and currency manipulation. However, the agreement on agriculture is not ironclad. If carried out it could harm third countries and contravene WTO rules to which China is strongly committed. China has not sought to depreciate the yuan for many years.
The trade war has set in motion a trend towards “decoupling” but it is not clear how far this trend can go or what dangers could result from it. Many large U.S. (and other) corporations have begun to move their supply chains out of China to Viet Nam, India, Mexico, and elsewhere to bypass U.S. tariffs. However, production has not generally returned to the United States, as promised by Trump, in part due to the lack of an industrial and infrastructure policy. Moreover, the aforementioned U.S.-led consolidation of the North American economy has not been replicated fully within the transatlantic space, which appears set to experience significant trade conflicts in 2020. Very few countries, for example, have agreed to blacklist Huawei as they move to adopt 5G networking equipment. In 2019 Huawei’s global sales increased by 18% to a record $122 billion and its European sales remained stable.
The phase two negotiations will take place against a backdrop of a highly polarizing presidential campaign. Notwithstanding a low nominal unemployment rate, after three years in office Trump can offer little more than rhetoric to the working class segment of his base. The centerpiece of Trump’s policy, the massive tax cuts enacted at the end of 2017, have not spurred greater investment but rather stock buybacks. They have greatly accelerated the upward redistribution of wealth that is the hallmark of the neoliberal era and pushed the U.S. budget deficit to nearly $1 trillion and the national debt beyond $22 trillion. Manufacturing employment in the midwestern battleground states that carried Trump to victory in 2016 has actually declined.
In this context, Trump will need to choose between two strategies: a return to confrontational trade policies would appeal ideologically to his base but the resulting economic uncertainty could provoke a recession and damage his electoral prospects. However, if Trump pursues more conciliatory policies he will encounter strong opposition from powerful forces within not only the military industrial complex and intelligence community but also throughout corporate America which increasingly regards China’s further military and technological challenges to American power as unacceptable. Democratic Senator Charles Schumer, for example, has already proclaimed that Trump has “sold out for a temporary and unreliable promise from China to purchase some soybeans.” Trump is more likely to opt for confrontation, but even his defeat in November would be unlikely to produce a “reset” in the U.S.-China relationship.