Why US-China talks should focus on technology as the greater threat, instead of trade
- A trade deal is unlikely to achieve US hawks’ objectives and might even make American companies in China more beholden to the Communist Party’s influence
- Balancing market openness on technology with national security threats is the policy challenge of our time
Thus, as Trump reignites the spectre of further tariff escalation by threatening to impose 25 per cent tariffs on all imports from China, there are some still cheering him on.
The trade war will never substantively achieve any fundamental objective that American trade and security hawks might be looking for, regardless of how hard Trump negotiates.
That would help rebalance some of the economic benefits within the bilateral relationship and provides a justification for some degree of American pressure.
In fact, increased involvement by American firms in China is likely to indirectly aid this process, as knowledge and technology inevitably spill over to other firms within and across industries.
Importantly, some of those Chinese firms will more than likely have benefited from state support of some kind (displeasing trade hawks) and all will remain beholden to the Communist Party (worrying national security agencies).
American firms may also become more beholden to the party’s influence the more invested they are in China.
Neither will Trump’s tariffs materially slow China’s economic rise nor shift the balance in relative economic weight in America’s favour.
The damage to the United States would only be slightly smaller, meaning America would gain almost nothing in relative terms.
Conversely, to the extent that China undertakes market-oriented reforms to resolve the trade conflict at America’s behest, this is likely to boost China’s long-term growth prospects more than it does that of the US.
Conversely, a deal would only increase integration between the Chinese and American economies, possibly worsening distributional issues within the US.
The true geoeconomic battle is in technology, not trade. Here, there are real trade-offs to be had between growth-enhancing openness and the potential security costs this could entail.
Getting the balance right is going to be a key policy challenge for some time to come.
This is important. It won’t derail China’s economic rise but it could put a sizeable dent in its growth prospects. China is still at a catch-up phase in its economic development. It needs access to the global technology frontier to keep advancing rapidly.
China might be interested in doing a more substantive deal if the US could also agree to ease recent technology-related restrictions.
Trump is now ratcheting up the pressure on Beijing in the hope of getting a better deal than what China is apparently willing to offer.
At some point, the cheerleaders for this approach must weigh whether the concessions from China that might ever realistically be achieved are really worth the escalating cost.
Roland Rajah is director of the International Economy Programme at the Lowy Institute