Valdai Club

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.”

Strongly supported by corporate America, the new agreement reinforces the deregulatory aspects of the previous NAFTA, strengthens protections for intellectual property thereby enhancing the power of the Silicon Valley giants, and keeps Canadian and Mexico open to U.S. farm exports. Concessions to U.S. workers in the form of provisions to increase wages in Mexico and thresholds for North American labor content enabled the administration to secure acquiescence from unions and congressional Democrats. Nevertheless, these modest reforms cannot reverse the massive damage done by the NAFTA over the past quarter century: the outsourcing of hundreds of thousands of U.S. manufacturing jobs, the evisceration of unions, and the devastation to Mexico’s small farmers and ensuing northward migration.

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.

 If for Beijing the phase one deal reflected an awareness that time is on its side, it clearly represented a tactical retreat for Trump, who by refraining from the imposition of new tariffs sought to prevent an economic downturn and to avoid antagonizing voters in the Midwestern farm belt during an election year. However, this strategy is unlikely to persist in 2020. The U.S.-China rivalry will continue to escalate beyond tariffs into policies towards technology, investment, export controls, and restrictions on investment. The increasing weaponization of the U.S. dollar will lead to more sanctions and counter-sanctions. The events in Hong Kong and Xinjiang will almost certainly become linked to trade negotiations, as indicated by passage in Congress of the “Hong Kong Human Rights and Democracy Act” in November with virtually unanimous support. By continuing to block the appointment of judges to the WTO Appellate panel and now threatening to put a hold on the WTO’s budget approval the Trump administration has set the stage for unilateral and confrontational trade strategies far into the future.

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.

To be sure, the U.S. firms continue to maintain a substantial lead in many advanced technologies, most notably semiconductors, but China is devoting massive resources to these areas and appears capable of closing the gap within a decade. At the same time, large U.S. firms such as Apple, Qualcomm, General Motors, and Tesla remain heavily dependent on production and sales in China. In 2017 the total revenue of U.S. companies in China exceeded $540b. The systematic decoupling of the world economy would be economically—and perhaps geopolitically—disastrous. These realities indicate the challenge that U.S. negotiators will face in 2020. Trump has discovered that trade wars are not “easy to win.”

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.