The key question with regard to US-China relations overall is whether the US business community, which has been until recently the foundation of US domestic support for the China relations, feels more able to do business, writes Valdai Club expert Robert Manning, Resident Senior Fellow at the Brent Scowcroft Center on International Security. Chinese mercantilism and techno-nationalist policies had soured many US firms from doing business in China, and they began to move factories to Southeast Asia and other locales.
The US and China are the largest economic and two largest trading powers in the world. The outcome of current trade negotiations will have a large impact on the future of the global trade system. Despite President Trump’s heavy-handed tactics – tariffs, etc, China’s mercantilist industrial policies have drawn a similar response from much of the world: the EU, Japan, Australia and other nations. They are all pursuing complaints against China in the WTO with regard to Chines forced tech transfer policies and curbs on foreign direct investment in key tech sectors. It appears a US-China trade deal will be reached. It should be noted that many of the US demands involve market reforms that leading Chinese economic officials favor – and Xi himself has pledged to do, but avoided implementing. So Trump’s pressure could prove to be a lever for much needed economic reforms in China.
It is unfortunate that Trump is pursuing US trade grievances bilaterally. US farms, and the US oil and gas sector stand to gain in the near-term, as well as US financial services, insurance banking and other service sectors that China is likely to open to foreign ownership. A big question is whether China will walk back is Cybersecurity legislation and to what degree. The US wants China to allow foreign ownership of the Cloud, free flow of commercial data from foreign firms operating in China. I think both sides will benefit in varying degrees from the market openings, and that is likely to be extended to other nations as well. The key question with regard to US-China relations overall is whether the US business community, which has been until recently the foundation of US domestic support for the China relations, feels more able to do business. Chinese mercantilism and techno-nationalist policies had soured many US firms from doing business in China, and they began to move factories to Southeast Asia and other locales. I will be surprised if the benefits are exclusive to the US and China from the trade deal.
The US rejection of TPP, Trump’s slapping tariffs on key US allies like the EU, Canada and Japan and move toward managed trade has led US allies and partners in both Asia and Europe to accelerate hedging against US uncertainty. Japan pushed forward CPTPP without the US, the EU is frantically signing trade agreements, the EU-Japan trade pace is one important milestone of this trend toward a post-American trade system. This hedging extends to the security realm, as Trump’s denigration of allies and alliances has raised growing doubts about US reliability. Since Trump loves tariffs, he is likely to keep pushing them forward. There is pressure from the US Congress to cease tariffs, especially on Canada an Mexico, and that may be one compromise Trump has to make to get the new US/Canada/Mexico trade deal approved by Congress. 25% auto tariffs on Japan and EU could result if current trade talks with both nations do not reach satisfactory outcomes in Trump’s eyes. The role of currency as factor in trade is a legitimate issue. There will be some understanding on the RMB in the US-China deal, but I do not see any currency wars.
As for the consequences of this competition for Russia, Moscow has to consider how dependent it wants to be on Beijing. Russia has become the #1 source of oil and gas for China, but the future of the global economy will be driven by the emerging technology revolution – AI, 5G/Internet of Things, autonomous vehicles, 3D printing, biotech, new materials. It will drive economic growth and geopolitical status. The Eurasian Union is not a large enough market for Russia, it needs the EU market to be competitive, and that will require diversifying its economy, something that is frequently talked about by President Putin’s advisors, but not much has happened. Russia is still mainly dependent on oil and gas and military industry. Russia as an APEC member might want to consider joining the CPTPP, and reach broader trade agreements between the EU and Eurasian Union.