US-China decoupling is hard to do

Top US and Chinese officials participated in a scheduled call for a “constructive dialogue” on trade issues, Aug 24, 2020

The cracking sound of ice breaking in the frozen US-China relationship is audible with the two big powers holding a high-level “virtual meeting” on Tuesday to discuss trade and related issues. In spite of everything, the US and China are finally talking.

The backdrop is that in the so-called phase I of their trade pact, signed in January, which was aimed to bring to an end the US-China trade war that began in 2018, Beijing had agreed to purchase record levels of American products in 2020 and 2021 in exchange for the US cutting trade war tariffs. 

But halfway through 2020, largely due to the pandemic, the pace of China’s purchases is behind where it should be. It fuelled speculation that the agreement was at risk of falling apart. The focus at today’s meeting was to review progress, but “other topics” also, inevitably, figured in the discussion. 

The meeting took place at the initiative of the American side. It was originally slated for August 15 but Trump delayed the talks, presumably with an eye on the Democratic and Republican party conventions where perceptions mattered. 

China fielded its economic czar, Vice Premier Liu He (who is also a member of the Politburo of CCP Central Committee) while the US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin (both cabinet rank) participated from the American side. 

The Tuesday talks mark a rare moment of cooperation between the two powers. After the talks, officials on both sides sought to assure the public—and the markets—that phase 1 is on track. The Chinese media reported that it was a “constructive dialogue on how to strengthen bilateral coordination on macroeconomic policies, and on implementation of the phase one economic and trade agreement.”

Importantly, “The two sides also agreed to create conditions and an atmosphere conducive to pushing forward the implementation of the trade deal.” The US readout also said “Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.”

The US statement said, “The parties addressed steps that China has taken to effectuate structural changes called for by the Agreement that will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer.  The parties also discussed the significant increases in purchases of U.S. products by China as well as future actions needed to implement the agreement.” 

The Chinese experts have interpreted that “the subtext of both sides agreeing to foster an atmosphere conducive to the implementation of the trade deal could be positive news for Huawei, which is currently under attack from the Trump administration.” Indeed, American microchip companies have been badly hit too, as Huawei has been their biggest customer by far, importing tens of billions of dollars worth microchips annually. 

Conceivably, the Trump administration’s easing of its earlier order banning Huawei from buying microchips from US companies comes even as China ramps up imports of US agricultural and energy products from the US. To be sure, there is growing pressure from US farm and energy lobbies on the US administration, which are important for Trump’s campaign in the November election. 

Trump is facing a tough reelection campaign as the election is only three months away amid the raging pandemic and a historic decline in GDP, which largely explains his intensifying multifaceted campaign against China. However, the meeting on Tuesday underscores the continued importance of trade and economic relations in the overall matrix. 

All through the recent turbulent period in the relationship, Beijing has remained unwaveringly committed to ensuring the stability of China-US economic and trade relationship. The pandemic slowed down China’s purchase of US products but China has nonetheless acted on all of the 50 items it was expected to work on through the first four months of implementation of the trade deal. 

China has continued to buy American commodities, such as agricultural products. Interestingly, notwithstanding the Trump administration’s bullying of TikTok, Beijing is opening up the Chinese market for American companies, especially financial companies.

The US oil exporters say they are readying to send a record level of crude exports to China in September, and US agricultural officials say that agricultural exports to China have been on the rise in the last few weeks.

The plain truth is that, as a recent paper by the Peterson Institute for International Economics estimates, “US-China financial decoupling is not happening.” In July, a survey by the American Chamber of Commerce in China showed that 84 percent of US enterprises are unwilling to withdraw from China, and 38 percent of them will maintain or increase their investment in China. Of course, Chinese companies have also remained very eager to increase their investments in the US.

China’s balancing of the relationship with the US through a period of exceptionally high tensions is proving to be successful. Basically, it stuck to the maxim that diplomacy is the “art of possibility” and kept doggedly working to reduce and avoid conflict and confrontation, while at the same time seeking to achieve with constructive and rational tools its strategic missions, which in this case is about the country’s peaceful development and sustainable growth. Suffice to say, the rationality of China’s goals and methods stands out as exceptional.

China clinically analysed that the criticality of the present moment is to be attributed to a large extent to the overlapping of Trump’s desperate need to get re-elected for a second term with the China hawks’ agenda to advance moves to suppress China, while, the political reality is also that the US is not solidly united as a single behemoth.

Therefore, China didn’t fall into the trap of “tit-for-tat” measures in the face of Trump’s (rather, state secretary Mike Pompeo’s) strident anti-China campaign. Instead, it showed restraint while holding its ground where resolute responses were needed.

Certainly, from Beijing’s perspective, it also helped that the Trump administration’s hysteria over China eventually backfired within the US and also abroad, with hardly any support for the hype of a new cold war in the international community.

And, most important, there is a paradigm shift insofar as the Chinese economy is back on a sustainable growth trajectory. And that hasn’t gone unnoticed in the US, which is itself in a deep recession amidst a raging pandemic.  

Maintaining cooperation with the US amid this current strategic competition poses a huge challenge for China, but the leadership’s long-term vision for the country’s development demands that the all-important relationship with the US should not be hijacked by the “China hawks” and right-wing forces in the US whose agenda is to drag China into a new cold war. That strategy is working.

Tuesday’s talks represented a rare friendly encounter between the US and China — perhaps, the first of its kind — in months and, shortly after the news broke, markets worldwide signalled relief. The talks signal the recognition by both Washington and Beijing that the trade deal is the glue that is holding the relationship together in a period when other channels of communication aren’t working well.