SHANGHAI – Just days before the coronavirus shut down the Chinese city of Wuhan and change the world, the Trump administration and China signed what both sides said would only be a temporary truce in their trade war. 18 months.
Since then, the pandemic has blurred global priorities, international trade has stagnated and increased again, and President Joe Biden has taken office. But the truce endures – and now appears to be setting new, lasting ground rules for global trade.
The deal did not end many of the same practices that sparked the biggest trade war in history. This does nothing to prevent China from paying large subsidies to a range of industries – from electric cars to airliners to computer chips – which could shape the future but for which the country is often heavily dependent on American technology.
In turn, the truce left in place most of the tariffs the Trump administration imposed on $ 360 billion a year on goods made in China, many of which were subsidized. Such unilateral measures run counter to the spirit of world trade rules, which were put in place to prevent nations themselves from starting economic conflicts and keeping them from spiraling out of control.
But the new model seems to be catching on. The European Union announced on May 5 that it was drafting legislation that would allow it to heavily penalize imports and investments of subsidized industries abroad. EU officials, who initially looked down on the US-China truce, said their policy was not specifically targeting China. But trade experts were quick to note that no other exporter had the scale of manufacturing and the scale of subsidies available to China.
“You see a real appetite in the US but also in the EU for unilateral action,” said Timothy Meyer, a former State Department lawyer who is now a professor at Vanderbilt Law School.
The truce, known as the Phase 1 agreement, could still be supplanted by a new agreement. The deal requires both sides to conduct a high-level review this summer. Last week in Washington, Katherine Tai, the U.S. Trade Representative, held an introductory call with a senior Chinese official, Vice Premier Liu He – a signal that Liu, the same chief negotiator who confronted the administration, will be kept in place by China.
But the prospects for a major new deal this year are slim. The Biden administration is developing a comprehensive strategy towards China, a complex interagency process that could last until early next year. He has also shown little appetite for relaxing China’s trade practices, and he has publicly discussed smoothing ties with European and other allies who have been troubled by other disputes under the Trump administration.
“We welcome the competition,” Tai told lawmakers earlier this month. “But competition must be fair, and if China cannot or will not adapt to international rules and standards, we must be bold and creative in taking measures to level the playing field and improve our own capabilities and partnerships. “
On the Chinese side, Beijing will not budge on the issue of subsidies, said people close to the positions of the two countries who insisted on anonymity because they were not authorized to discuss it publicly. Aside from numerous requests that the United States simply drop its tariffs, China hasn’t even made a proposal to revamp the deal, they said, as Chinese officials don’t want to discuss subsidy limits.
If this intransigence continues, Phase 1 could continue to establish trade rules for years to come.
Although a few provisions expire at the end of the year, the agreement includes permanent requirements, such as China’s stop forcing foreign companies to transfer technology to Chinese companies as a condition for doing so. to do business. An obscure clause also calls on China to purchase increasing amounts of American goods until 2025.
That could pave the way for more focused talks, including over whether China has met the deal’s annual purchasing targets. The two sides could also discuss the solar industry, which has sparked earlier trade disputes between them, but could have a new look as the Biden administration emphasizes climate change.
On the face of it, the Phase 1 trade deal fell short of the Trump administration’s goals. The administration had hoped the negotiations would balance the large trade imbalance between the two countries and curb Chinese subsidies, which US companies and officials see as state-funded competitors for US industries.
Instead, the United States’ trade deficit with China again widened by nearly half, to $ 78.6 billion, in the first three months of this year from a year earlier, fueled by pandemic purchases such as consumer electronics, exercise equipment and other goods made primarily in China.
But Chinese imports from the United States have caught up since bad weather and a deadly swine disease whetted China’s appetite for food grown in the United States. He Weiwen, a retired Commerce Ministry official who is now executive director of the China International Trade Association in Beijing, said China has made a sincere effort to meet its commitments.
“China is not violating this phase 1 agreement,” he said.
In the long run, the Phase 1 deal could cement the US approach of using tariffs to offset China’s willingness to retool and modernize its economy with lavish subsidies.
The Trump administration attempted during the trade war to persuade China to forgo subsidies for its exporters, which include cheap land for factories and large loans to manufacturers at below-market interest rates. The Biden administration also provides for large subsidies, but these are primarily aimed at research and development, a category of subsidies that rarely violates international trade rules.
Some economists in China have also tried unsuccessfully over the years to argue that the country’s industrial policy is too expensive and increases its debt burden.
But Beijing has stood firm, reluctantly tolerating US tariffs instead of accepting limits on subsidies. In the past year and a half, China has doubled its subsidies in many sectors. Xi Jinping, the country’s top leader, strongly endorsed China’s desire to achieve industrial self-sufficiency.
Even making a serious offer now to swap cuts in Chinese subsidies for cuts in US tariffs would require dealing with powerful national constituencies in China. Most government departments now appear determined to spend whatever it takes to transform the country into a technological powerhouse, people familiar with China’s economic policies said.
Premier Li Keqiang signaled in his annual report to the Legislature in March that China remains committed to strengthening its manufacturing sector, already by far the world’s largest. “By pursuing economic growth, we will continue to prioritize the development of the real economy, modernize the industrial base, modernize industrial chains and keep the share of manufacturing in the economy fundamentally stable,” a- he declared.
Chinese officials seem more open to talking closely about solar energy. Such a deal could involve lifting Chinese tariffs on US polysilicon, the main raw material for solar panels, in exchange for removing US tariffs on Chinese panels. It would make solar power cheaper in the United States and help Americans become less dependent on coal and other fuels that contribute to climate change.
Exports of U.S. polysilicon, mainly produced with electricity from hydroelectric dams in the Pacific Northwest, would also reduce China’s dependence on polysilicon production using electricity. coal in its western region of Xinjiang. A recent report alleged that the Chinese government has worked with large Chinese solar companies to create jobs in programs activists describe as prone to human rights violations.
The Chinese government has denied that any abuse took place.
But a deal would worry those in Congress and elsewhere who argue that the West needs to consolidate its industrial base and who underscore its dependence on Chinese solar panels.
“Countries outside of China,” said Seamus Grimes, professor emeritus at the National University of Ireland who studies Chinese supply chains, “are increasingly aware of their dependence.”