A major hurdle in trade talks: US and China ‘play by different economic rules’

A veteran observer of US-Sino relations fears the stark differences between the nations’ economic systems will lead to a long trade deadlock

PUBLISHED : Tuesday, 21 August, 2018, 8:30pm
UPDATED : Wednesday, 22 August, 2018, 10:23am

This week’s trade talks between China and the United States are unlikely to result in a substantial breakthrough because their economic systems are incompatible with each other, a former US trade official said.

“Economic interaction between China and the US is like a football game being played between the winner of the US Super Bowl and the winner of the World Cup,” Timothy Stratford, managing partner of Covington & Burling’s Beijing office and a former assistant US trade representative, said in an interview.

“The two teams have very different ideas about how to play the game, and each is showcasing different approaches and skills for moving the ball down the field,” he said.

“Arguing about who is following the rules and who is breaking them would not accomplish anything. But if neither team wants to change the rules it’s playing by, then you either have to stop playing with each other or you have to come up with new rules to reduce the harm that each team inflicts on the other.”

Watch: Origins and impact of US-China trade war

Multinational companies with Chinese or US operations have been caught in the crossfire of the trade war, which officially began on July 6 when the two countries imposed 25 per cent tariffs on US$34 billion of each other’s goods.

As a result, some companies have started adjusting their supply chains or investment plans, despite the costs and the unknown factor of how long the trade war will last.

“What’s happening now is that the current deadlock is causing companies from both countries to rethink their sourcing and investment plans in order to reduce risks,” Stratford said. “The result is that a gradual process of decoupling the two economies has begun.”

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“It doesn’t mean that US and Chinese companies will stop doing business completely, but it does mean that continued business will only make sense if the advantages outweigh a 25 per cent tariff and other risks,” he said.

But Stratford is concerned there is a “strong” chance the deadlock will be long-lasting since the countries are deeply divided in their economic and trade positions, and because of a lack of readiness or meaningful discussions to address the gaps.

China has defied the US requirement to overhaul the state-supported economic model, especially in its technology catch-up plan “Made in China 2025”, saying it is defending its development sovereignty and accusing the US of using the trade war as a new containment tactic.

On the other hand, the US has voiced discontent about market distortion and unfair competition in favour of domestic champions under China’s state-sponsored economic structure, concerns that are widely shared by other trading partners of China.

“It doesn’t seem that China will be willing any time soon to change fundamental elements of its economy that seem to have been working well from a Chinese perspective,” Stratford said. “This suggests that the deadlock will continue and that further tariffs and other sanctions may be imposed by both sides.”

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“Perhaps in the future, China will decide that because of the changing external circumstances its system is not working as well as it did in the past,” he added.

“But in the meantime, unless the US decides to adopt more of a state-led economic model, our two countries may need to think more about how to coexist and cooperate when we are playing by different rules on the same playing field.”

Chinese Commerce Vice-Minister Wang Shouwen will lead a delegation to Washington for talks on Wednesday and Thursday. It is unknown whether the discussions could put on hold the second round of 25 per cent of tariffs on US$16 billion of goods scheduled to take effect on Thursday.

“Vice-Minister Wang will probably focus on trying to understand better what the American position is,” Stratford said. “A realistic goal for the talks is not that the two sides would reach an agreement, but rather that the two sides would better understand each other and whether there is a reasonable path forward.”

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“In a sense, instead of talking directly about the trade, they will probably talk about ‘talking about trade’. They will be sizing up one another to determine whether it’s the proper time yet to discuss anything truly substantive,” he said.

Stratford said the US may not be in a hurry to have substantive talks, while it was “unrealistic to expect China to be willing to offer something really significant so soon” since Beijing will take time to assess the economic and political impact on both countries.

Watch: Are Chinese consumers less willing to buy US goods?

Given the strong US economy, “there’s no compelling reason at present” for the Trump administration to move away from the current trade measures, Stratford said.

“We also need to consider that if the US backs down now, they will undermine their credibility to ever negotiate with China on these issues again because they’ve already brought out their biggest artillery pieces – namely, the threat of tariffs on billions of dollars of Chinese goods.”

“To be totally candid, the track record of bilateral discussions with China over the past decade has led some US officials to believe that having discussions with the Chinese government on these issues is a waste of time – at least for now,” he said.

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Observers have noted that confrontation between the world’s two largest economies has moved toward the geopolitical front, adding complexity to an economic resolution.

“Geopolitical considerations are harder to separate from economic matters than they used to be, and this complicates economic cooperation when dual-use technologies such as semiconductors, big data and artificial intelligence are playing a very important role in many sectors of the economy,” Stratford said. “The impact on national security has to be factored in by both countries.”

“The two countries need to understand the true nature of the problems they face in their bilateral trade relations and have serious discussions about how to address them. It appears that those discussions are only just beginning.”