Yokohama, China © Pixabay/megurawa

Yokohama, China © Pixabay/megurawa

Eagle versus Dragon: No End to the U.S.-China Trade Conflict in Sight Even During the Pandemic

In the trade dispute between the United States and China, the omens of rapprochement before the pandemic were good. Both countries agreed on a “Phase One Deal”: China committed itself to more imports from the United States; no further punitive tariffs were to be imposed. However, most of the tariffs remained in force. Moreover, the major structural issues remain unresolved. What does a U.S. administration under Joe Biden think about China?

Trade relations between the United States and China have never been easy. Under President Donald Trump, however, the conflict between the two economic giants escalated. The instrument of choice: additional tariffs. Both sides repeatedly raised tariffs in bilateral trade.

In the summer of 2018, the United States imposed additional tariffs of 25 percent on goods imports from China worth 34 billion U.S. dollars for the first time. Barely a month later, further tariffs of 25 percent on an import volume of 16 billion U.S. dollars followed. In the fall of 2018, the conflict intensified further, resulting in further U.S. tariffs of 10 percent on an import volume of 200 billion dollars. China responded with its own retaliatory tariffs. In spring 2019, the tariffs spiralled further when the Trump administration raised tariffs for imports from China worth 200 billion U.S. dollars from 10 to 25 percent. At the beginning of September 2019, additional U.S. tariffs of 15 percent came into force on part of the so-called List 4 products worth 112 billion U.S. dollars. China did not take long to respond by escalation.

While the average U.S. tariff on imports from China was still 3.1 percent at the end of 2017, it rose to 21 percent at the beginning of September 2019. Following the conclusion of the so-called Phase One deal, the average tariff fell to 19.3 percent at the beginning of 2020. The average tariff burden on U.S. exports to China jumped from 8 percent to 21.1 percent in the period from end-2017 to mid-September 2019. In early 2020, China reduced the average tariff to 20.3 percent. Since then, the high tariff burdens on both sides have remained unchanged despite the corona pandemic. The legal basis for customs duties on the part of the United States is Section 301 of the Trade Act of 1974.

Not Only Tariffs Burden the U.S.-China Economic Relations

However, it is not only tariffs that burden economic relations between the United States and China. Trump set himself the goal of decoupling the U.S. economy from China. From his point of view, especially with regard to new technologies, the United States should be independent.

Among other things, Trump used the Entity List to prevent trade with individual Chinese telecommunications and technology companies for security reasons.

The Trump administration also issued an Executive Order concerning the information and communication technology (ICT) supply chain, according to which additional reviews or, if necessary, a ban by the U.S. Department of Commerce is to be initiated if “foreign adversaries” could exploit weaknesses in the U.S. ICT infrastructure. This new regulation has also been repeatedly criticised by the U.S. ICT industry due to many unclear terms.

Congress has also passed the Export Control Reform Act (ECRA) in 2018. The Export Control Reform Act aims to protect the national security of the United States by regulating U.S. exports. The focus of ECRA is on dual-use goods. With ECRA, U.S. export control rose in geo-economic significance. The law expressly obliges the President to use export controls to maintain the economic leadership of the United States in the natural and engineering sciences, industry and basic research. As a consequence, the law introduced further controls for certain emerging and foundational technologies.

Also in 2018, Congress tightened government controls on foreign investment with the Foreign Investment Risk Review Modernization Act (FIRRMA).

Phase One Deal

After long negotiations, Washington and Beijing agreed on the “Phase One Deal” in mid-January 2020. China agreed to import additional U.S. products and services worth 200 billion U.S. dollars over the next two years. This includes industrial goods worth a total of 77.8 billion U.S. dollars, energy sources such as LNG, crude oil, and refined products worth 52.4 billion U.S. dollars, agricultural products worth 32 billion U.S. dollars, and services (including patents, or tourism) worth 37.9 billion U.S. dollars. In addition, the People’s Republic seeks to open up its markets more to foreign financial service providers. Beijing will also refrain from forced technology transfer in the future. It also wants to ensure that any technology transfer is voluntary and takes place on the basis of free market conditions.

In addition, the protection of intellectual property is to be strengthened. Furthermore, both countries agreed on new principles against targeted currency devaluations. Finally, the agreement includes a monitoring and dispute settlement mechanism. In return, the United States announced to reduce the tariffs on Chinese imports worth 120 billion U.S. dollars introduced early September 2019, from 15 to 7.5 percent. For the time being, the additional 25 percent tariffs on U.S. imports of Chinese goods worth 250 billion U.S. dollars will not change. This means that a U.S. import volume of 370 billion U.S. dollars is still subject to additional tariffs – about 70 percent of total Chinese exports to the United States. The United States thus maintains essential leverage. China, on the other hand, is halving its tariffs on U.S. goods worth around 75 billion U.S. dollars.

The new Chinese five-year plan holds further potential for conflict. Beijing wants to strengthen the domestic economy under the banner of the so-called “dual-circulation strategy”. Domestic value chains are thereby to be strengthened and further deepened. In addition, further export markets are to be opened, the supply of resources secured, and foreign investments attracted.

Competition of Systems

What is the reason for the trade conflict? The United States has had a huge trade deficit with China for years. In 2019, it amounted to 308 billion U.S. dollars. The United States rightly accuses China of taking advantage of the international trading system while in many cases failing to respect its promises of accession to the WTO. The lack of protection of intellectual property, distorting state subsidies, and forced technology transfer for joint ventures in China are problematic.

But the conflict between the United States and China is about more than that. For one, the United States is concerned about having to share its supremacy as the sole superpower in the world with China in the future. However, the underlying conflict of values is even more significant. The trade conflict is an expression of an increasingly clear competition between completely different economic and political systems. China’s economic hybrid model with a strong state influence collides in more and more areas with the market economy and democratic principles of the West. Both sides are therefore seeking to reduce economic dependencies. This is reflected, for example, in revised export control rules and stricter controls on foreign direct investment in the United States. China, on the other hand, wants to reduce its dependence on foreign technology, for example in the area of semiconductors, microprocessors, and software.

However, a decoupling process between the two largest economies entails enormous risks and costs not only for U.S. companies and consumers, but also for the global economy.

What China Policy Will Joe Biden Pursue?

Joe Biden has repeatedly sharply criticized the Trump administration’s approach to China and the “Phase One Deal”. In his view, the partial agreement did not solve the issue of illegal Chinese subsidies and brought only little concrete benefit to U.S. workers.

Nevertheless, Biden is also likely to continue to put pressure on China to move on the yet not agreed points of a potential “Phase Two Deal”. After all, China’s trade practices and the high trade balance surplus with the United States are a thorn in Biden’s eye. In December 2020, Biden stressed that he did not want to take any immediate steps in the U.S.-Chinese trade conflict. He can count on the support of Congress in this respect: Democrats and Republicans agree that a hard line against China is in the United States’ own interest.

Unlike his predecessor, Biden wants to strengthen old alliances and partnerships in order to take joint action against illegal Chinese trade practices. European lip service concerning China will certainly not be enough for the 46th President of the United States. He will demand a rigorous commitment from the EU to fair competitive conditions in world trade.