Feb. 18, 2021

US-China Trade Relations: Experts Size up Possible Shifts

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As the US approaches its first 30 days under a new administration, the trade community is watching for signs of US-China economic change. Under the prior administration, a barrage of tariffs defined a trade war that resulted in a Phase One deal. Now, trade agreements and alliances may shift as the Biden administration weighs its choices and renews alliances with other nations.

In a recent webinar, Flexport Chief Economist Phil Levy moderated a discussion with Bob Davis, Senior Editor at the Wall Street Journal, and Damien Ma, Director of the Paulson Institute’s MacroPolo think tank. Here’s what the experts noted.

Phase Two?

Whether a Phase Two trade deal is on the horizon remains to be seen.

Today, China has a $14 trillion economy and is a leading nation. A Phase One deal had allowed the US to leave the door open for later-phase dealings.

But, with so many numerical targets across sectors and no timeline for completion, total Phase One compliance may be a long shot. Factors like the Covid pandemic and US economic contraction complicate the picture.

The current administration hasn’t shaken things up yet, but it’s unlikely to replicate past approaches across the board.

A webinar poll shows 43.5% of respondents think tariffs are the most important issue up ahead. The experts expand upon that, remarking that industrial policies of both nations will play a part.

Domestic Concerns

The respective domestic concerns of the US and China vary. As one example, the overall health of the US agricultural market may impact how the Biden administration chooses to address unmet Phase One targets for agricultural buys.

A more complex possibility: In China, a demographic turn will reduce its labor force in the longer term. A redistribution of wealth as its current workforce ages could arouse political volatility, especially in a nation with high debt.

Unique pressures like these could bend the relationship between the two nations.

Domestic responses to global concerns will also influence the score. The Biden administration has stated its commitment to human rights, so it may be a point of contention; on matters of climate change, cooperation may be simpler.

Multilateral Cooperation

For the US, cooperation is at the forefront of its newly stated goals. While the past administration tested its relationships with allies, this one could reaffirm alliances. One good reason: China has recently overtaken the US as the EU’s largest trading partner.

By strengthening relationships with other nations, the US could increase its bargaining power to influence China. On the other hand, multilateral cooperation could come with restraints, like Congressional approvals or the demands of other nations.

Once these circumstances become riper, trade stances will become clearer. Read selected excerpts below or for the full conversation, watch The State of Trade: Where Does U.S.-China Trade Go Now?

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Phil Levy: Hello everyone, and thank you for joining us for today's webinar, The State of Trade: Where Does US-China Trade Go? This webinar is part of our State of Trade monthly webinars series of experts offering timely insights into the rapidly changing world of international trade.

And, now, the good stuff. Well, almost the good stuff first. I'm your host. I'm Phil Levy. I am Chief Economist at Flexport, but we have two excellent panelists joining us today to discuss what's going on in US-China relations. First, we have Bob Davis, Senior Editor at the Wall Street Journal. He is a Pulitzer Prize-winning senior editor based in Washington, DC. He covers economic issues and writes incisively about China, where he was posted from 2011 to 2014. He is the co-author with Lingling Wei of the excellent Superpower Showdown: A History of the US China Trade and Economic Standoff. Some of which we'll be discussing today, but it's an excellent book. I recommend it. He's served as the Journal's Bureau Chief also in Brussels, covering the EU and the Latin American Bureau Chief, and he's coming to us from Washington DC. Bob, thank you for joining us today.

Bob Davis: Thank you. Nice to be here.

Phil Levy: And we also have Damien Ma, who is Director and Co-Founder of Macro Polo, the think tank of the Paulson Institute. He is the author-editor of a number of books, In Line Behind a Billion People: How Scarcity Will Define China's Ascent in the Next Decade, and has also taught, as I did, at Northwestern's Kellogg School of Management. Damien, wonderful to have you with us, coming to us from Chicago.

Damien Ma: Thank you Phil, great to be here.

Phil Levy: All right. And so, now onto business, here's what we're going to talk about today. We're going to take on the issue of where do we go next in US-China economic relations. We're going to focus on the economic part. And the plan is that we're largely going to pick up the story with the Trump administration's approach, which one could argue—we'll put this up for debate—but could argue as a radical break in the way the US dealt with China. And we're going to go from that to discuss what can we expect under the Biden Administration.

As a warmup, as a way to get us started, and because I have the microphone, let me just offer a few ideas to characterize the pre-Trump era in US-China relations just happens to be something that I worked on while was at the State Department when Bob Zoellick was developing his responsible stakeholder policy. So let me give you three ideas on this.

Idea number one, something to keep in mind, and this I think is indisputable, it's important to remember that China's economic prominence changed radically over time. So if you look right now, China is just under 20% of world GDP. If you go back as recently as 2000, that number was something more like 3%. So it's—and it's sometimes hard to sort of go back in time and sort of recognize that difference—but it's a much more prominent role than it was earlier. So, idea number one was sort of growing prominence.

Idea number two: China's leadership ideas and motivations have changed significantly over time. When China joined the WTO in 2001, it was under a reforming administration that wanted a bigger role for market forces and looked to the West as an example. That became much less true. I would date it back to the global financial crisis, but my colleagues here may have a different take. The point being there's certainly been change over time in the Chinese approach. It has not been a constant.

And I guess the third idea that I would put forward is that US commercial diplomacy towards China had, at least until the Trump administration, been very much an attempt at the art of the possible. It was seen as unlikely that the US, even when China was much smaller than the US, could simply demand whatever it wanted of China and that China would accommodate.

Whether or not that was done optimally is another question, something one could certainly debate. All right. So we're about to have Bob tell us whether he agrees with what I just said and what we saw during the Trump administration. I don't think I'm giving anything away to note that there was a trade war. That all of you are aware of this. We had it, lots of tariffs, in a way that we really had not had before.

Where do we stand in US-China economic relations after the Trump Administration?

Phil Levy: But what did we see under the Trump administration? What was distinctive about this approach? Where did it, where did it leave us?

Bob Davis: Well, again, thanks. Thanks for having me. I think the most relevant thing you said to the way I think about it, anyway, the Trump approach was the bigger, much larger share of the global economy that China occupied. So let's go back even further. It's 2016, it's the presidential campaign. You know, Donald Trump is campaigning as the person who's going to take on China with tariffs of 50%.

So, I mean, as you all know, I mean, [that administration] started the Section 301 report, which, you know, was basically, you know, a declaration of trade war. Right? I mean, it was essentially saying that China was cheating and was pressuring US companies into giving away valuable technology.

The tariffs initially were meant to compensate the United States for what were the, what the calculation was. The impact of a forced technology transfer. But after that, it was all punitive. It was to try to twist China's arm into doing what the United States wanted. And it proceeded that, you know, around September, 2018.

US Goods Imports

Bob Davis: Donald Trump threw tariff after tariff after tariff on China and with no real costs, no real cost at all. But by September 2018, the stock market was starting to react to every little twist and turn. I can tell you as a person writing these stories, every little twist and turn in the market would go up to the market would go down.

And as the, you know, election came closer and closer that became a big issue because he cared. The President cared a lot about the stock market as a measure of success.

US Goods Exports

Bob Davis: And so Donald Trump who had not been particularly aggressive on China, on non-economic issues, basically gave the head to Pompeo to national security council to take one action after another on issues like repression of Muslims in Xinjiang the actions of the party when it came to Hong Kong and, in a weird way, the trade war two years of a trade battle, trade relations between the US and China became one of the few strands holding this relationship together.

Phil Levy: That is interesting. Damien, I want to get your take on this as well. What if you were going to sort of broadly characterize what was different, effective, ineffective about the Trump years? Bob just gave us a nice summary, which actually is remarkable for how much he simplified, what happened. The details are in the book, the going back and forth who's running things. It was a masterful summary. Damien what's your overview of the Trump administration experience?

Damien Ma: To piggyback off of what Bob said, you know, I think he touched on some of the fundamental issues of the Chinese economy that I think for a long time, the United States government was, was not pleased with and, critiques market access barriers, those types, technology, forced technology transfers and all of the subsidies to industry IP. It can go down a list. Currency for awhile. You know, when you were in DC, that was a big issue as well, although it's less of an issue now. So, you know, I think the idea for a lot of—you know . . . so-called . . . the policy wonks in DC, they were hoping for a phase two that would eventually tackle some of these longstanding problems.

But we never got there. And I think those were really the key issues for if you're talking about US companies and investors, it was those, sort of, behind the borders, competitive issues, you know.

Phil Levy: We'll delve into the issues more in a second, but one of the things I think the Trump administration seemed to pride itself on—and you guys can correct me if I'm wrong—was that it was supposed to be a radically different take. They had been very critical of predecessors for having endless dialogues, you know, strategic dialogue, strategic and economic dialogue, and getting sort of broad promises on issues.

Bob, you described these as somewhat sort of fantastical. The sort of numerical targets, but wasn't that supposed to be the thing that was different? And actually, I'll give you each of you in turn, Bob, you first, then you Damien, a chance to weigh in on that poll question, which we posted the audience on: as we look back at that, at the section 301 trade war, you know, successful unsuccessful, misguided, worth a try. That's a bunch of stuff to throw at you, Bob, but why don't you go first and then we'll turn back to Damien.

Bob Davis: I forget exactly what the choices were, but I would go with a worthwhile try and it didn't work out. I guess it's different to have specific and supposedly enforceable targets. That is true, but I think what was really different about it was too, try to deal with these structural issues, you know, Chinese pressure on US companies to hand over technology. But to try to deal with them in a forceful fashion, by imposing tariffs on them. I think that was, that was very, very different.

I mean, in this, whatever you think of this trade deal, it is a signed trade deal between three countries, whether Biden tries to enforce it or not, this is an issue, but that is also I think, significantly different.

Phil Levy: Yeah. And I'm going to come in just one second to this, this trade deal and the whole phase one, phase two, but before we do, Damien, your take on this question of the Section 301 trade war: successful, unsuccessful, misguided, worth a try?

Damien Ma: We have enough evidence now you see the bilateral deficit going up. Part of that is obviously because of COVID and the pandemic, but I think the evidence suggests it was probably likely misguided. It was a wrong tool to achieve the outcomes that we would want.If the intent is to use that tool, to get them, you know, more behavior modification on the Chinese side that was not, that was not achieved.

Phil Levy: And was that foreseeable?

Damien Ma: Yeah, from the Chinese perspective, they looked at it as sort of the, you know, Japan playbook of the 1970s and 80s. And they lumped it with the Plaza Accord back in the day. That's how they looked at it. And they were obviously not going to bend you know, in that, in that sense.

Phase One Trade Deal — Numerical Targets & Phase Two Deferred

Phil Levy: Yeah. All right. So I want to take for both of you before we sort of leave the experience of the Trump administration. This is also going to be your chance to make last points on this.

Drawing on some of the work done here by the Peterson Institute and Chad Bown, they're talking about the phase one trade deal. So a couple of aspects of this first, it was phase one that was supposed to be a phase two, which dealt with more of these issues.

You had described, but second, it did present numerical targets. This was sort of how it was supposed to move beyond these communiques that Bob described where you made a bunch of empty promises that were hard to enforce or hard to check.

And what we see here somewhat in miniature, but on the screen is the, there were a lot of promises. It was a pretty one-sided deal, in terms of the promises were mostly Chinese promises to purchase more.

And for whatever reason, obviously we did have a pandemic and other things happen, we fell short on those promises. So Bob, maybe I can ask you at the start. How did we end up with this breakdown into phase one and phase two and, and, you know, do people know that this was going to happen? Or do you see this pandemic surprise? How do, how does that particular deal look in retrospect?

Bob Davis: Well, the way they wound up with phase one and phase two is because, you know, as I was mentioning around September 2018, they realized they wanted a deal and they couldn't get a deal on the structural issues, and I forget whether it was Lighthizer, or Minutian, but somebody came up with the idea of like, oh let's call a phase one and then phase two. And they joked among themselves. It's like whenever they would hit a hard target, you know, a hard issue in another area, they'd say, okay, well that's a phase two issue, you know?

So I think from the beginning they realized the chances of a phase two agreement were vanishingly small. But they were looking to get the best deal they felt they could get at that particular time. So I don't think the last administration never really thought that they had much of a chance for a phase two negotiation before the election.

Phil Levy: Do you think there was an expectation that those numerical targets would be met?

Bob Davis: On the US side? I mean, they just seem so outlandish, it's hard to imagine they really thought they would, even before COVID. But well, yes. Okay. Let, I'm just thinking this over. Yes, because they have this view and—curious what Damien would think . . . They have this view, you know, this kind of storybook view of China that the Chinese government and the party can do whatever it wants, all of that needs to do with snap its finger and this company, and that company will do exactly what they want.

You know, whether they lose money, whether they don't, whether they're privately owned, whether they're not. And so to the critics, who said, you know, what you're doing is reinforcing the pattern that you want to get away from. Right? I mean, the reinforcing state authority, by requiring the state to order companies to buy US goods to which the Trump people would say, we're just recognizing reality. That's the way China is. So, yeah, I suppose they did think they would actually hit those targets.

Phil Levy: So, Damien, what's your view on this? Was that sort of driving? I think, well, we don't think that there's, that this finger snapping actually works, but was there any realistic way that China could have met these?

Damien Ma: I think, you know, if you looked at every single sector, I mean, there was an energy target, there was an agricultural target. There, there were several, you know, pretty aggressive targets. I mean, on the energy side, I don't think every single market was going to be realistic, but I think, you know, something on agriculture, perhaps there was, there was some sense there that could be met because obviously there were also some political reasons there for ag purchases.

But I don't think the Chinese thought it would be, it was entirely realistic to have kind of met every single target across the board. I mean, there's only so much, you know, natural gas that they're going to need in any given year. And there's a limit to that, you know, especially, you know, I mean, you know, contracted pretty significantly in China, too.

Phil Levy: It did, yeah. What'd you think of the point that Bob made, which is, who would be in charge of these purchasing decisions in China? And that is as a centralized process. Are you working decision-making private groups? How does this fit into the way China actually makes purchasing decisions?

Damien Ma: Yeah. I mean, there are a lot of stakeholders. Obviously, the guy in the lead is Vice Premier, who is the negotiator. They have to work through a lot of stakeholders. It can't be, sort of, be able to snap their fingers and, you know, all 150 central SOEs or 105 now or something like that, or just say, well, okay, well we'll, we will each meet, you know, $20 billion of purchases. It doesn't, it doesn't work that way. It doesn't work that way.

Key Players in Trade

Damien Ma: Yeah. Well, I think Bob probably has more insights than I do. I'll just say a few things quickly. I think the basic point here is, in my view anyway, there's a higher political cost to reverse certain things that are already in place, like tariffs. You know, I think, I think the political cost to kind of reversing. It's just going to be higher.

And so I think, you know, in your first a hundred days, that's probably not something you might want to touch, you know, weighing the cost versus benefit of doing so. And not to forget, you know, Biden's been—he's launched a lot of different task forces. There's one at DOD. There's gonna be, I think, a number of them kind of, you know, do a thorough review of China policy across the board.

But we're obviously talking about the economic side, which I think we'll also get a review. So I think right now there's, they're kind of in a similar holding pattern. And I think obviously, you know COVID is dominating, preoccupying all their time and, and efforts and that's, that's not a surprise.

So after a hundred days, we may see some, see some changes there, but I do think that to the extent the political cost doesn't seem to change that much, that calculus, then I think it might be, it will be interesting to see what they actually do or don't do.

Meaning leaving things alone might be a better option than trying to do, you know, trying to reverse things.

Phil Levy: Yeah. Okay. So let's, let's take that. And Bob, back to you on this, the point that Damien just made that, you know, most of our presidents coming in, came in where there was a lot of rhetoric. But it wasn't that they had sort of an active trade war going and there does seem to be this difference, just as Damien said, between taking off a policy or reversing something versus being slow to adopt one. Add that to the sort of political constraints you talked about where Congress is, how much room for maneuver is there for Biden, and at what point does he then start owning these Trump policies, if he stays the course?

Bob Davis: You know, it is politically difficult for him. You know, I mean, what you can see, I suppose this is something, I mean, there's no talk from the Biden camp, either the president or any of his advisers about more tariffs, right? I mean, if Trump was in there, you know, this house on three quarters of everything could stove her, you know, raise the tariff rate or, you know, add in more categories to the tariffs. There's no talk of that.

There is talk, you know, we'll get around to deciding about rolling back tariffs. Once we've consulted with our allies. Once we get our people confirm, once we've talked to Congress, that's a lot of that. So that's a lot of discussions, right?

And the Chinese don't seem to be pushing particularly. I think, their trade situation isn't bad at all. It's that they're doing much better than people expected to them to do. And I imagine that includes analysts in, in Beijing as well. So it's not really an economic pressure for them.

This administration argues unlike the last, you know, it's a drag on the US economy. So, but it's not the biggest drag. The biggest drag is obviously COVID, and that's where they're getting their focuses. My view is like, you want us all to go away for like two or three months, and then, you know, let us work out our policy, then we'll come back and we'll tell you what we're going to do.

Damien Ma: So, to add a very quick point to that which I wanted to tag on to my comments is I think one of the main lessons in my view anyway from the Trump administration, you know that some of the things that Bob talked about is that . . .

It just seems like unilateral decoupling is very hard. Whatever term you want, you know, but, ultimately, it doesn't seem to work that well. And part of it is because China is a $14 trillion economy. It's the only major economy that's got positive growth last year, and it has choices. I think it just came out yesterday or a couple of days ago that China is now the biggest trading partner with the EU, overtaking the United States for the first time.

And, of course, US, China, and the EU are much closer on the issue of climate change than they are right now with the United States. And climate change, if you define it as an economic issue, that's a huge, huge deal there, too. And, part of why the Chinese and the EU signed their bilateral investment treaty was a lot of— it was because of climate, as well.

So, I think, just this idea of unilateral decoupling doesn't seem to . . . I will say that's one of the main lessons. If I were to take one from the last few years.

Phil Levy: Right. It never struck me that they had a particular plan for how, it sounded nicer as a theory, perhaps than as a practice. If you now then have to say, all right, well, and then what did the Canadians and the Europeans and the Japanese think, you add on still further constraints?

Bob, do you think this is going to be, sort of, lip service to a multilateral approach? Or is that something that they’re really committed to?

Bob Davis: I think they are committed to it in a, in a sort of macro sense, in a broad sense, the idea. United States democracy as a model for the world is not exactly a shining example at the moment. So there's that issue. But in addition, I think they will push for alliances on a whole variety of, let's call, the technocratic issues. The argument the last administration made as to why they moved unilaterally. It's because the Chinese, as they would argue that the Europeans and then particularly the Japanese might talk a good game, but they will never impose sanctions. They will never agree to pose sanctions and only the US will. And so you're better off leading by acting unilaterally.

But we'll see, we'll have a real life example.

Want to learn about the big choices confronting the Biden Administration, what’s next, and much more covered during this webinar? Watch the full conversation here.

Disclaimer: The contents of this webinar are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. We do not guarantee, represent or warrant any of the contents of this webinar because they are based on our current beliefs, expectations and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This webinar has been prepared to the best of our knowledge and research, however the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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