US-China trade war: The issues ahead of the Trump-Xi meeting

In order to bring to an end, or at least significantly deescalate, the current US-China trade war, numerous issues will need to be either resolved, placed on a course toward resolution, or managed in a mutually agreed way. It is difficult to see a breakthrough agreement being reached by US and Chinese negotiators prior to the meeting in Japan between US President Donald J. Trump and Chinese President Xi Jinping on June 29 or by the leaders themselves. Perhaps the best we can hope for would be agreement on a few items as a show of progress and good faith, and a commitment not to take further adverse actions against one another for a designated period of time while negotiations continue. Something more than that would be warmly welcomed by markets, by a wide range of businesses and consumers, as well as by many in the world who fear massive disruption if escalation continues.

Most of the issues the two nations continue to grapple with relate to difficult systemic or “structural” differences on such matters as protection of intellectual property and trade secrets; equal access and rights for foreign investors in both the United States and China; a level playing field for businesses; and a consensus on what are appropriate amounts and types of government support for critical 21st century technologies and state enterprises.

And even if US and Chinese negotiators surprise us by reaching an agreement that both Trump and Xi can sell to their publics as a major success, that agreement will be unlikely to resolve all of the economic differences between the United States and China. This is just the beginning of a much longer process.

The United States and China have long-term aspirations and ambitions for the decades ahead. They each seek to strengthen—utilizing different sets of policies and incentives—their competitive capabilities in 21st century technologies and their regional and global economic positions. They especially aim to do so in those advanced technologies that have major, indeed transformative, economic as well as strategic benefits. Technologies such as AI, 5G, robotics, supercomputing, and quantum computing are vital for economic growth and job creation in both nations. They also have profound implications for national security and international political influence in such areas as telecommunications, management of strategic information, cyber, and space.

In the current US-China negotiations, the overlap between trade, investment, and national security is far greater than in any trade negotiation the United States has engaged in previously  or any talks the United States and China have had in the past. This is why the stakes are so high and the issues so complicated. Competition in these industries and sectors involves stakes far greater than traditional trade objectives. And it will be pursued by both nations employing very different, and often conflicting, policy tools for a long time to come.

Even if some of the systemic issues being discussed were somehow resolved—with the best of intentions by both sides, and through the considerable skills of their negotiators—there are likely  to be frictions and frequent disputes on a range of other issues  such as investment restrictions in critical sectors, strict curbs on various critical technology imports and exports vis-à-vis one another, and potentially new confrontations relating to exchange rates. These could last well into the future.

For example, recent  US legislation, passed by the Congress with bipartisan support, will curb various kinds of foreign investment and impose new export restrictions largely aimed at China. Given its bilateral support, some of these provisions could last for a long time even if all the tariffs were to be lifted tomorrow. This legislation, the National Defense Authorization Act, expanded the mandate of the current Committee on Foreign Investment in the United States (CFIUS) to prevent certain categories of foreign investment into the United States related to “critical technology;” these include “emerging and foundational technology,” “critical infrastructure,” and classes of “sensitive data” of US citizens. Related provisions of this Act also impose new export controls on “emerging and foundational technologies.”

These new provisions taken together, and an ongoing expansion of items included on the US government’s “entities list” of foreign companies (and other entities US businesses are forbidden from selling to), could impede the development of Chinese high-technology industries and accelerate the “decoupling” discussed in my earlier pieces. It remains to be seen whether these are simply being used by Washington as negotiating levers in current talks or are being deployed as longer-term instruments to weaken China’s economy, prevent or slow that country’s rise as a technology power, and reduce its influence in the US economy. Recent statements from senior US officials in the executive branch and Congress make it look more like the latter.

If the current confrontation escalates, and more restrictive measures of this type are imposed, that would certainly have significant adverse effects on China. But it would also have various negative implications for the United States. Depending how the new CFIUS rules are implemented, for example, they could impede otherwise beneficial Chinese investment in the United States, and other facets of this legislation would cut deeply into the exports of US technology companies that depend heavily on the Chinese market and on their manufacturing capacity in China. China’s own efforts to develop advanced technologies would also be given more impetus. Both the economic and security benefits and costs need to be weighed by US officials charged with implementing this legislation and developing the United States’ longer-term strategy.

Determining exactly what products and technologies fall into categories described in this legislation will be a major task. While they are being sorted out there will be a great deal of uncertainty. Interpreting and implementing this legislation is sure to produce major issues for Chinese and US importers, exporters, and investors who will find it difficult to make decisions in the face of that uncertainty. It will also lead to countless disputes between the United States and China if it leads to a wide range of new restrictions, as well as to disputes between impacted US companies and US government officials charged with implementing these new laws.

China, for its part, sees support for state-owned enterprises, key technology-related private companies, and more generally its rising high-technology sectors as a whole, not as an ancillary feature of its economic policy but as a central part of it and of the country’s multi-year growth and national security strategy.  If the United States imposes extensive or extended measures on Chinese companies and on the Chinese economy, Beijing is likely to impose countermeasures and, as mentioned in my earlier blog posts, seek more extensive trade and investment relationships with other nations to reduce the adverse impact of US actions on its economy.   The extent to which the Chinese government supports state enterprises—e.g., the level of subsidies or the degree of transparency—can perhaps be negotiated to some degree, but the underlying principle of state support for major enterprises and advanced technologies almost certainly will remain. So will China’s emphasis on maximizing integration with other economies through its Belt and Road Initiative and other expanding international initiatives. Similarly, China places great emphasis on local storage of data in order to avoid access to it by foreign governments and companies. It also does this to provide its companies and government access to big data for commercial and security reasons, and it has very different privacy laws from the United States and other Western nations. These also are unlikely to change.

Robert Hormats is an Atlantic Council board member, vice chairman of Kissinger Associates Inc., and a former US undersecretary of state for economic, energy and environmental affairs.

This is part of a series of blog posts on the US-China trade relationship in the run-up to the meeting between US President Donald J. Trump and Chinese President Xi Jinping later this month at the G-20 Summit in Japan.

Image: US President Donald J. Trump and Chinese President Xi Jinping arrived for a state dinner at the Great Hall of the People in Beijing, China, on November 9, 2017. (Reuters/Jonathan Ernst)