For nearly one year and a half into Trump’s presidency, China-US economic and trade relations have gone through twists and turns and entered a period of drastic adjustment. In spite of the important agreement reached by the two sides after three rounds of trade negotiations, the US suddenly announced on June 15th additional tariffs on US$50 billion Chinese goods. In the next few hours, China made a swift response, stating that it would immediately adopt tariff measures of corresponding scale and intensity and that all the results of previous trade talks became invalid simultaneously. In the face of China’s reciprocal retaliatory measures, the US threatened to draw up a tariff list of $200 billion Chinese goods on June 18th. Without any doubt, China will adopt reciprocal measures to defend its interests. Once a massive trade war starts down the road, it will cause panic on the market, pose a grave threat to the fragile world economic recovery, and may even lead to a new global economic crisis. It can be seen that the Trump administration has set the tone and established the framework for its tough economic and trade policy toward China. This will have a major impact on the economic, trade and political relations between the two countries for a long time to come. 

1. The Trump Administration’s New Tough Economic and Trade Policy toward China

1.1 The Making and Adoption of the Policy

Trump made statements on China-US economic and trade relations during the election campaign, calling China a currency manipulator and intending to raise tariffs on Chinese exports to the US. After assuming presidency, he focused on America’s massive deficits with China in trade in goods. His new offensive economic and trade policy toward China fast took shape. And there are two phases for the policy to be adopted:

1.1.1 The Phase of Probing and Preparation (January 2017 to March 2018)

During this phase, Trump completed two jobs: making legal preparations necessary for adjusting the economic and trade policy toward China, and putting together teams for negotiation and decision making. In April 2017, the Office of the United States Trade Representative (USTR) published the Special 301 Report, accusing China of stealing US commercial secrets and engaging in rampant online copyright infringement, and putting China on the “priority watch list”. In August, Trump signed the executive memorandum, authorizing the US TR to review “China’s trade practices”, including forcing US companies to transfer technology and stealing US intellectual property. After a period of adjustment, the Trump administration established a team of conservatives for its economic and trade policy toward China, the core members of which include USTR Robert Lighthize, Commerce Secretary Wilbur Ross, Secretary of the Treasury Steven Mnuchin, and White House Trade Advisor Peter Navarro. 

1.1.2 The Phase of Shaping Up (March to June 2018)

Two important events marked the shaping up of the new US economic and trade policy toward China. First, Trump signed the presidential memorandum on March 23rd, announcing restrictions on China’s investment in the US and planning to impose steep tariffs on US$60 billion imported Chinese goods. The Trump administration ditched the all-encompassing model of consultation and communication that had been used for over 10 years, which featured the “China-US Strategic Economic Dialogue” and the “China-US Strategic and Economic Dialogue”. It has switched to a results-oriented model of technical negotiation that focuses on specific topics with a clear agenda. Second, ZTE reached an initial reconciliation agreement with the US Department of Commerce. The ZTE case traced its origin back to 2012. Its temporary solution was adopted in the context of intensifying China-US trade frictions. And ZTE has been used by the Trump administration as a bargaining chip in trade talks with China. 

The content and mode of Trump’s new economic and trade policy toward China are still in a process of dynamic development and will be adjusted as the two countries negotiate and interact, and regional political and economic landscape evolves. 

1.2 The Nature and Objectives of the Policy

1.2.1This policy is, in nature, an important component of America’s comprehensive strategy to contain China. The policy actions adopted by Trump since coming to power speak to his intention to take China as an adversary and contain China in all areas, from politics and economy to military and culture. In the National Security Strategy Report and the 2018 Defense Strategy Report, the Trump Administration identified China a “strategic adversary” or “strategic competitor”. The new offensive economic and trade policy is the first one to take shape in the US strategy to contain China, targeting the economic foundation on which a country’s development and rejuvenation depends. It is more than about reducing US trade deficits with China and adjusting bilateral economic relations, but will be in synergy with containment policies in other fields. The Cold War mentality behind it will dominate the tone of America’s China policy for a fairly long time to come. 

1.2.2 The Trump administration goes all out on the offensive. In a high profile, it plays tough to pressure China into talks with a view to following objectives: 

First, containing and even reversing the momentum of China’s economic rise. Since the 2007-2008 financial crisis, China has been the only country that is on a fast track to catch up with the US. Between 2007 and 2016, China’s GDP rose from US$3.55 trillion to US$11.2 trillion, with its share in global GDP expanding from 6.15% to 14.84%. The US GDP increased from US$14.48 trillion to US$18.57 trillion, and its share in global GDP dropped slightly from 25.05% to 24.58%. In 2007 and 2010, China surpassed Germany and Japan respectively to become the second largest economy in the world. China’s GDP grew from less than 80% to more than 2.5 times that of Japan. Its gap with the US also shrank from 4.07 times to 1.64 times. 

Second, maintaining America’s international competitiveness in middle to high-end manufacturing. In the memorandum signed on March 23rd, Trump intended to impose additional tariffs on Chinese goods in technology-intensive industries, such as IT, new energy vehicle, artificial intelligence, bio-medicine, high-speed rail, and aerospace. All these goods account for about one-eighth of China’s exports to the US. The US also intends to restrict investments in China that involve joint venture and technology transfer in areas where China leads the world or has gained stronger international competitiveness thanks to progress in recent years, or in areas where Chinese investment in the US or American investment in China are concentrated. 

Third, dominating future international economic and trade order and rules. In TPP and TTIP negotiations, the US hopes to introduce high-standard new rules in a wide range of areas such as trade, investment, intellectual property, labor, environmental protection, and dispute settlement mechanism, to ensure its dominant position in making the future global economic and trade order. The Trump administration, however, thinks and acts differently. It brushes aside the existing global multilateral system and applies pressure through bilateral negotiations with the support of regional multilateral tactics. It tackles trading partners one by one to promote trade rules it endorses. Trump shares the same goal as his predecessor to reverse the weakening of US leadership in global economic order. 

1.3 The Features of the Policy

1.3.1 Aiming for quick action and victory. Trump has acted swiftly and in high profile. Three months after taking office, the USTR Office released the Special 301 Report, putting China on the priority watch list. Shortly afterwards, he authorized the USTR to start the review process. Within half a year, he used the memorandum to single out the categories of goods subject to substantial additional tariffs and went a step further to produce a specific list with the amount of goods. 

1.3.2 Using a mixture of measures. Under the principle of “trade is politics”, the Trump administration focused on economic and trade issues. He is keen to play geopolitical cards to exert pressure, as evidenced by successive actions on the South China Sea, Korean Peninsula, Taiwan, regional economic cooperation, and cybersecurity. He hopes to use these issues to achieve his goals in trade negotiations. 

1.3.3 Getting support from the Congress. As Trump keeps provoking trade disputes globally, important figures and forces in both the Senate and the House voiced strong opposition in principle. However，when it comes to adjusting economic and trade relations with China, there has been muted opposition in the Congress. To contain China, the Congress is even reluctant to use its constitutional power to constrain the trade policy authorization enjoyed by the Trump administration. 

2. Structural Changes in China-US Economic and Trade Relations

Since the 2007-2008 financial crisis, major changes have taken place in a range of fundamental factors that underpin China-US economic and trade relations. As such, bilateral economic and trade relations will go through serious adjustments. Frictions and conflicts will persist for a long time to come. 

2.1 The changing positions of China and the US in the global value chain. The two countries take up important positions in the global value chain. After its accession to the WTO, China has been more deeply involved and its positionelevated in the global value chain. In 2007, China’s manufacturing output accounted for 13.2% of the global total, ranking number two in the world. That figure rose to 19.8% in 2010, 1.6% higher than the US, making China the largest manufacturing nation. For eight consecutive years, China has been the world’s largest exporter of goods. Industrial products dominate China’s exports and account for nearly 20% of the global total, 1.7 times those of Germany which came next after China. 

According to the UN Comtrade database and OECD estimation, China remains at the lower end of the global value chain, processing, manufacturing and exporting final products. It is yet to move up from the low-added value end of the global chain. China is still the world’s largest producer, and the US the largest consumer. That said, China is already one of the core countries in the three manufacturing centers, namely North America, Europe, and Asia, on the global value chain，and it is moving up to the high end of the value chain. The share of Chinese exports’ domestic added value increased steadily, from 65.83% in 2007 to 70.65% in 2014. This is mainly because China’s manufacturing sector has significantly improved its capacity to undertake high-level and professionalized tasks, and has been more deeply involved in producing intermediate goods with higher added value or on the high end of the value chain. In the same period, the US saw its share declined slightly, from 85.98% in 2007 to 84.72% in 2014. 

2.2 The growing asymmetry in two-way investment. China-US investment relations are going through notable changes. Chinese investment in the US, instead of being dragged down by the financial crisis, has been on the increase, skyrocketing from US$356 million in 2007 to US$46.2 billion in 2016, at an annual pace of 71%. Since 2000, China has invested a total of US$136.5 billionin 1,510 projects. The pattern of Chinese investment in the US is changing, too. First, merger and acquisition is no longer the main form of investment. Greenfield investment accounts for 56%. Second, the share of state capital is dropping among the investors. Private capital has reached 75%. 

The US direct investment in China has reversed since the financial crisis. Despite the rebound at some point, it is on a downward trajectory. American investment reached US$21 billion in 2008, the highest record, and has since stayed at an annual amount of US$13 billion. In 2015, China’s direct investment in the US amounted to US$15.3 billion, for the first time exceeding American investment in China during the same period. The stock of American investment in China is about US$240 billion. According to the annual report of the American Chamber of Commerce in China, 81% of the surveyed American companies in China believed that their business in the country was not welcomed, and 25% of the surveyed considered or have already moved all or some of their business outside China. 

The two sides are in intensive debates on issues such as asymmetric capital flows, market access, and volatility in the business environment, which stand in the way of bilateral investment and economic relations. In recent years, the CFIUS has blocked a number of M&A deals by Chinese companies such as SANY and Financial Ant in the US on the grounds of national security. The US Congress also plans to pass the Foreign Investment Risk Review Modernization Act to turn the foreign investment review mechanism into a technical control mechanism. 

2.3 New features in the volume, product structure and pattern of China-US trade. Since the financial crisis, the share of China’s exports to the US in its total exports has been in the range of 16.71%-19.11%. The US is China’s largest export destination. In the same period, China has become the third largest export market for the US, taking over 5% of America’s global exports. China-US trade has increased more than 1.9 times. In addition, the high-growth momentum in bilateral trade registered since the financial crisis has moderated. China has started to restructure its industries and foreign trade, which triggers a dramatic transformation of its export model. Processing trade used to account for over 50% of China’s foreign trade, but has dropped to the current level of one third or so. General trade now dominates China-US trade, with a share of more than 55%. 

From the perspective of product structure in bilateral trade, the categories of China’s exported goods to the US and their shares have remained largely unchanged since the financial crisis. This shows that the traditional exported goods from China are still competitive internationally and that the American market has sustained stable demand for Chinese products. In the meanwhile, there have been notable changes in the structure of American exports to China. China’s import of American soy beans has been increasing year on year. Over the past five years, the US exported soy beans with the value in the range of US$17.8 to 25.9 billion, among which 60% were sold to China. China is the largest importer of Boeing aircraft, leading to increasing American export of aerospace products and components to China. Currently, Boeing sells one quarter of its jets to China. While the growth of trade in goods shifts speed, China-US trade in services has increased fast and enriched bilateral trade. All these changes testify to China’s economic and industrial restructuring and the increasing role of consumption in driving its economic growth since the financial crisis. 

2.4 America’s changing strategic perception of China’s development. The US has seen China as a “strategic competitor”, “stakeholder” as well as “partner and competitor”. The rising tensions between the two sides can be seen in their wrestling on issues like the South China Sea, Korean Peninsula, regional economic integration, and cybersecurity. The Belt and Road Initiative and the establishment of the Asian Infrastructure Investment Bank have made the US more suspicious of China’s global strategic intentions. Soon after taking office, the Trump administration explicitly labeled China as an “adversary” and considered the imbalances in bilateral economic relations and China’s economic and trade policies as a challenge to American interests and America-dominated international economic order, which was criticized as “economic aggression”. On one hand, he used summit diplomacy, “Twitter” diplomacy, and time-bound high-level negotiation to directly apply pressure. On the other hand, he expressed positive support to Japan’s Indo-Pacific strategy to limit China’s influence in the Asia-Pacific region and the Belt and Road Initiative. At the 2017 APEC meeting, Trump once again made a statement on a “free and open Indo-Pacific region”, asking all parties to abide by the rule of game, saying the US no longer tolerates “cheating in trade”, and forcing countries in the region to pick sides. 

3. A Proper Response: Firmly Defending China’s Development Interests while Seeking Common Ground, Putting aside Differences and Prioritizing Negotiation. 

Over the years, economic and trade relations have been recognized as the “ballast stone” and “stabilizer” of China-US relations.As Trump adopts new economic and trade policy toward China, the political and economic relations between the two countries are set to go through major adjustment. Therefore, we “cannot afford to solely rely on economic interdependence”, “but have to consider connecting economic and security topics in foreign policy.”

3.1 Making a comprehensive plan to properly handle trade disputes. It is important to plan bilateral trade negotiations from a global strategic perspective and with a view to the larger interests of China-US relations. Maximum efforts should be made to move China-US trade relations on a track of positive, healthy and stable growth. First, China has been consistent in further opening-up. Reform and opening-up is what is needed for China’s development and won’t change just because of an occasional single incident from the outside. Second, China is committed to focusing on cooperation and managing differences on the basis of mutual respect, resolving trade frictions and disputes in a constructive way, seeking the biggest denominator, and reaching consensus and agreement both sides are satisfied with. Third, China-US trade negotiations should be carried out under the precondition that the two sides meet each other half way and refrain from engaging in a trade war. Throughout the negotiations, if the US adopts and implements measures to impose additional tariffs on Chinese products, China will certainly take reciprocal measures to defend its interests. At the same time, the agreement and results reached by the two sides will be invalid. 

3.2 Maintaining strategic focus and confidence. On one hand, we should understand that the fundamental purpose of Trump’s trade war against China is to contain the rise of a big emerging country and defend US global dominance. China-US trade frictions have gone beyond the scope of trade. They are long-term and severe. On the other hand, China’s manufacturing sector has risen. China has enormous market potential and a huge capacity for making investment. As long as China stays committed to innovative development, developing advanced manufacturing, and pursuing opening-up as a state policy, China will embrace a bright future for technological advance and economic development. Whatever changes there may be in the world, China will remain focused on the strategy to developing itself.

3.3 Working hard to increase political trust between China and the US. As things stand now, the fundamentals of China-US relations are experiencing unprecedented changes. It is imperative to set a clear direction for and reposition the relations. The two sides are in a critical period of coordinating each other’s strategic perceptions. As the world’s top two economies, China and the US have forged deep interdependence in economic and trade fields. Interdependence, however, does not necessarily bring about mutual trust. The American realists believe that the growing interdependence has mostly come at the expense of American interests and should be redressed. As China becomes stronger, its national security strategy and philosophy on global governance have triggered suspicions and worries in the US. Trump pursues the “America First” advantage in global competition, refuses to be constrained by existing international treaties, organizations and institutions, and takes actions to intervene in Asia-Pacific affairs, though not under the name “pivot to the Asia-Pacific”. As structural adjustments are underway in China-US economic and trade relations, neither retaliations nor concessions for the time being are sustainable. A high degree of political trust is always the stabilizer for the sound growth of economic and trade relations. The two sides can continue to use the diplomatic and security dialogue and other mechanisms and channels to strengthen communication on the philosophies, objectives, policies and actions of national security strategies. It is important for the two sides to respect each other, focus on cooperation and manage differences, so as to steadily increase political trust. 

3.4 The two sides may renegotiate the BIT at an appropriate time and make attempts at free trade negotiations. Since the financial crisis, China and the US have interacted and coordinated on economic and trade rules at a pace slower than the fast growth of their economic ties. As a result, many problems have occurred. 

Since the normalization of relations, the two countries only signed the 1979 China-US Trade Agreement and the 1999 China-US Bilateral WTO Agreement, which played an important role in promoting the two countries’ relations during special periods. The 1979 agreement was signed shortly after the two countries established diplomatic relations. By giving each other the most-favored nation treatment, the two countries fast started and brought their economic relations on a sound track. The 1999 agreement was critical for China’s accession to the WTO. Since China became a WTO member in 2001, the two countries have been developing their economic relations under the multilateral trading regime with the WTO as the main pillar. 

The Doha Round negotiations led by the WTO to reach a global trade agreement on reducing trade barriers had stalled since 2008 and ended up in failure in 2015. The global multilateral trading regime has been widely criticized for its inefficiency. In this context, it is both realistic and reasonable to discussbilateral or regional trading arrangements as alternatives. For China and the US, the world’s most influential economies with close trade links, it is all the more imperative to build a new trade framework to solve increasing and complicated differences and problems. 

That said, the two sides will have greater difficulties in negotiating a comprehensive trade deal. It is more difficult to make breakthroughs in areas where the two sides have been long divided, such as market access, IP protection, and cybersecurity. But this is an issue that the two sides cannot bypass if they want to shape a healthier and more balanced economic and trade relationship. Therefore, a practical way is to start in a step-by-step manner from areas with a good cooperation foundation that are easier to make progress. For example, continuing the BIT negotiations that were close to completion under the Obama administration. Trump also expressed his intent to carry on the negotiations. After all, a balanced agreement that accommodates the realities and interests of the two sides will be conducive to reducing investment barriers and leveling the playing field for companies of the two countries. As Chinese investment in the US has been increasing fast in recent years, such an agreement will provide opportunities for Chinese companies to access the American market, ensure they are treated equally as American businesses in all stages of investment, constrain or prevent the US congress and government from making or implementing discriminatory laws, rules or industrial policies against Chinese companies. Companies can also resort to the dispute settlement mechanism established by the agreement to effectively protect their lawful rights and interests. The BIT will anchor investors’ market expectations on both sides, bolster capital flows, and coordinate the long-term economic interests of China and the US. 

On that basis, the two sides may explore solutions to the concerns that have been on their mind for a long time, for instance, transparency, market access, and technology transfer. When conditions are ripe, China and the US may expand their negotiations to trade in goods and services, and reach a China-US Bilateral Investment and Trade Agreement or a Free Trade Agreement. This will not only put in place an institutional framework for bilateral economic and trade relations, but also contribute to global investment and trade liberalization and facilitation and economic development and prosperity. 

The two sides need to add more substances to bilateral trade talks and upgrade the trade structure. The communication mechanism on bilateral economic and trade relations should be reformed, and professional negotiation teams established. It’s difficult for the dialogue mechanism toeither make visible progress on strategic goals, or facilitate in-depth discussions on technical and specific topics or topics on which the two sides are deeply divided. Currently, the two countries need to make breakthroughs on both political and economic relations. The dialogue mechanism cannot replace technical negotiations to make technical breakthroughs.

In terms of the content, the highlights and new growth points in bilateral economic relations should be encouraged. First, trade in services. In recent years, the growth of bilateral trade in services has hit new highs, with China becoming America’s fourth largest trading partner, third largest export market, and 11th largest import source in trade in services. At present, the US has an absolute advantage in service sectors that have enormous market needs and high added value in China. For example, tourism, education, intellectual property use and franchise service, financial services, transport, and other commercial services are the fastest growing sectors in China-US trade in services. The US is the top destination for Chinese students studying abroad. In 2016, Chinese students spent about US$45,000 in per capita terms, contributing an income of around US$15.9 billion for the US. Second, infrastructure. America’s infrastructure is aging and in urgent need of massive investment for modernization. After taking office, Trump prioritized infrastructure in his economic revitalization policy, and has pushed for a US$1 trillion investment plan. It is estimated that by 2040, the US will invest US$8.5 trillion in infrastructure, compared with the real need of US$12.4 trillion. This means a shortage of US$3.8 trillion. In recent years, Chinese investors have entered the US infrastructure sector. CRRC has invested in factories in Massachusetts and Illinois, and won procurement contracts for urban rail projects in Chicago and Boston. Third, agriculture. China and the US started very early in agricultural cooperation, which now has a solid basis. The two countries are important trading partners in agricultural products. China is America’s largest market for agricultural exports. The US is China’s largest source of imported agricultural products and fourth largest export market. Agriculture has been a vibrant sector in China-US economic cooperation and trade. In particular, there is a strong momentum of Chinese investment in American agriculture. In 2013, China’s Shuanghui Group acquired Smithfield Foods, the largest pig and pork producer in the US. As China transforms its industries and upgrades consumption, it will have a growing need for American agricultural products, food, and agricultural production and management technologies. With advanced agricultural technologies and high productivity, the US has deep influence on global agricultural production and trade. Over the past five years, America exported to China US$25 billion worth of agricultural products annually. In 2017, the two sides made breakthroughs on beef and rice trade. Expanding agricultural production as appropriate will be instrumental for the development of America’s agriculture and related sectors, and contribute to China’s food security. 

All in all, the structural changes in China-US economic and trade relations are the result of political, economic and cultural interactions between the two countries over the past years. They have taken place in the broader context of economic globalization and free trade. These changes have been accelerated by the 2008 global financial crisis. As the Trump administration has adopted a new economic and trade policy toward China, how the two sides respond will determine the direction of the changes. It will take both a long time and a spirit of collaboration to adjust and rebalance China-US economic and trade relations. The two sides must take into full account the correlation of each other’s domestic political and economic situation, stay committed to win-win cooperation, and refrain from confrontation that will only result in losers. A pragmatic, inclusive, balanced and incremental approach should be adopted to remove barriers, improve the level of trade liberalization and investment facilitation, unlock the tremendous potential in economic and trade relations, and establish an effective mechanism for management and cooperation that is grounded in the reality of the bilateral economic and trade relations. This will lead to mutually beneficial, balanced and sustainable China-US economic relations. 

--------------------------------------
Wang Ruibin is Deputy Director of the World Economy and Development Institute, China Institute of International Studies.