A Changing Relationship for a New Economic and Political Age

By Timothy Lobban

When a once Blossoming Relationship Began to Turn Sour

Since the reopening of relations between China and the USA in the early 1970’s, the relationship between the two nations has been relatively amicable. Granted, they have their differences, but the USA and China usually tend to agree to disagree, out of respect for each other and the understanding that long-term progress lies more in cooperation than in adversarial playacting.

However, with the passage of time and the process of deindustrialization, the US’s bread and butter of good, well-paid jobs in manufacturing suffered a series of blows. The passage of NAFTA (The North American Free Trade Agreement) worked to chip away at America’s industrial base, although, another major change – one that is often overlooked – also took place and vastly exacerbated the impact.

That event was China’s accession to the WTO (World Trade Organisation) in 2001. China’s entry into the WTO meant greater integration into the global economy and lifted previous barriers to international trade; in return for this, China liberalized a number of economic sectors and opened its doors to foreign investment.

This was the opening of a Pandora’s Box, and as investment from around the world (including the USA) poured into China, the country eventually became the world’s top recipient of foreign direct investment. The trade deficit between the USA and China widened, and the number of manufacturing jobs in America took a sharp turn downwards from 2001 onwards.

Since then, the USA and certain segments of its population have grown to become wary of free trade and have begun to register vocal discontent with trade arrangements between the USA and China and the rest of the world.

According to US polls conducted by the Pew Research Center, while overall approval of free trade has remained stable over the years, the percentage of people who believe that free trade is bad for the USA has grown significantly. In addition, what was once an almost nonexistent partisan divide between Democrats and Republicans on the benefits of free trade has now risen to historic highs, with only 36 percent of republicans viewing free trade as good for the USA compared to 67 percent of democrats in 2017. This is a dramatic change in roles, considering that in 2008 this difference was only 4 percentage points, and one that skewed more positively towards republicans.

Tough Talk on Trade

Politicians have taken note of changing American attitudes to trade, with President Obama having made campaign promises to reign in the export of jobs overseas to China from the USA and then partially acting on those promises with the passage of the ‘Buy American’ Act in 2009. The Obama administration also masterminded the ‘Pivot to Asia’ doctrine, which has been executed with the aim of containing China’s rise as a military and economic power in the Asia Pacific region and geopolitics in general.

Now we have President Donald J Trump, the billionaire president who has made calls to be tougher on trading partners (including China) and trade agreements since the early 2000s, and now makes no secret of his views on China and its trade relationship with the USA. Looking at these overall changes, some would suggest that relations between the USA and China have become more tense, and that a period of decades of detente is now on the wane.

Since coming into office, President Trump has signaled that he would like to review America’s global trade relations. These desires immediately manifested themselves in the withdrawal of the USA from the Trans-Pacific Partnership, with Trump now having opened up other existing trade deals to renegotiation. And even though most of 2017 saw nothing of further note come from the Trump administration in respect to the imposition of any broad sweeping restrictions on trade on other countries, signs of this may emerge in 2018. By then, the time for talk and investigations will be over and the US President will have to act.

The US Economy will Continue to Run Smoothly, but Cracks in the Dam Appear

2018 will also bring its unique set of economic and political pressures for both the USA and China, as one moves to try and painlessly restructure its economy and induce high quality, more equitable growth, and the other acts to safeguard economic stability in the face of upcoming elections and a potential slowdown in manufacturing output.

In 2017, both the US and Chinese economies saw strong consistent growth across the board; however, it was the US economy that saw more significant improvement in economic growth, manufacturing output and unemployment levels. The USA is expected to have grown at an annualized rate of 2.5 percent (up from 2.1 percent in 2016), with unemployment down from 4.7 percent in 2016 to 4.1 percent in 2017, and US manufacturing expanding at its fastest annual rate since 2004.

These gains were in part buoyed by a weaker dollar and growing business confidence and investment off the back of Trump’s tax reform policy, and by his moves to deregulate the economy by lifting government restrictions on how firms produce their goods and services. Nevertheless, while it seems that growth promises to be stable for the US in 2018, it may also mark as the year when cracks begin to appear, with these cracks potentially taking the form of a manufacturing dip and lacklustre wage growth.

Throughout most of 2017, the dollar saw its biggest annual depreciation in over ten years, hence why it came to no one?s surprise that US manufacturing saw such a strong resurgence in output as exports increased (with the USA seeing exports grow year over year by 5% in the second quarter).

However, upcoming elections in Italy, further rate hikes, and an anticipated surge of repatriated earnings from overseas to the US could contribute to reversing downward pressure on the dollar and in turn undermine US ambitions geared towards rejuvenating its industrial base in 2018 and beyond.

Then there is the persistent issue of flat wage growth, with real median household income barely above 1999 levels. Not to mention that despite higher levels of economic growth in the USA, it seems as if Trump will not be satisfied with things until GDP growth hits 4 percent, a target set by an administration that is largely banking on the success of their tax reform plan, which will see US corporate tax fall from 34% to 21%.

Nevertheless, many argue that annualized growth of 3 percent, in the coming years is asking for a lot, far less 4 percent. Indeed, the US economy would need something close to a perfect hand to achieve this level of growth, and 2018 may be the year where the groundwork is laid for this game. In the meantime, since it is likely to be of direct concern, China may want to be on the lookout for what America does next.

Time to Take off the Gloves?

Here is where, interestingly enough, a number of actions taken over the past few months by the Trump administration have gone further in revealing his playbook than anything else seen throughout his first year as President.

On November 30, days after the US commerce department launched an anti-dumping investigation into Chinese aluminum, the nation went on to inform the WTO of its opposition to having China recognized as a market economy. A move of this nature could go far in blocking Chinese ambitions of being officially recognized as a market economy and thereby be subject to lower tariffs and duties in global trade.

Moreover, just weeks before President Trump has to decide on January 26^th whether to impose restrictive measures on the import of solar technology (a renewable energy in which China is the world’s leading investor), the US government blocked the sale of MoneyGram to Chinese online giant Alibaba.

If recent actions are anything to go by then the US seems set to turn up the heat on issues concerning Chinese trade and business, and it is starting by going for China’s weak spots. Knowing that China is a big innovator in mobile payments, preventing Alibaba’s Ant Financial from acquiring MoneyGram goes some way to denting China’s ambitions to exploit its competitive advantage on a more global scale, and this will be followed by the threat of implementing protectionist measures on Chinese solar technology. America means business, and greater reciprocity in trade seems to be the deal of the day.

The dynamics of Sino-US relations are now being put to the test. As China continues to rise as an economic and military power, America is beginning to feel that its global dominance is being challenged in areas such as the Asia Pacific region by the militarization of the South China Sea. It now sees China for what it is, rather than what it was.

For the longest of times, the USA has overlooked many of these ambitions, preferring to concentrate most of its energy on doing business with the Made in China economy with a view to reserving a front seat view for the growth and development of the world’s largest market. Now that China has become considerably more developed and is swiftly moving up the value chain, the US understands that economic relations, now more than ever, need to change to reflect this.

Over the next few decades, a lot more of the money in China will lie in tertiary sectors such as e-commerce, mobile payments, and financial services – areas where until recently China has shown little sign of reducing protectionist measures. If anything, Sino-US relations are now maturing, and maturing in more ways than one. Thus, even though a trade war is always on the horizon, it remains in the interests of both nations to avoid one. Setting aside the minor squabbles, both countries will eventually come to the table and work something out.

Rouse doesn’t always Equate to Action

Therefore, in essence, America’s patience with China seems to have worn thin, as the world superpower feels that the current order of affairs as it pertains to economics and trade no longer satisfies, and now wants a larger slice of the pie. The odd murmurs of discontent on all things trade heard over the years are now transitioning into comprehensive, concrete policy measures.

However, with the dust yet to settle on this matter, China will probably move to appease the United States’ protectionist urges. There have been recent hints by the Chinese vice Premier that China may ease requirements for foreign firms on technology transfer, as well as open up more sectors such as financial services, education, healthcare and e-commerce to international investment.

Nonetheless, addressing trade imbalances with China is only one small part of the solution to tackling stagnant wage growth and rising income inequality in the USA. Further, widely dispersed and deeply connected supply chains, combined with growing automation means that only so many manufacturing jobs can return to the USA, even with a range of protectionist measures in place.

More focus needs to be paid by the US government and US firms to investing in the jobs which have helped contribute to full employment now – jobs in food and hospitality, health and social care and technology to name a few.

Timothy Lobban BA (Cantab), is a China Matters columnist as well as Lead Editor for forpotus.com and Copy Editor at china.org.cn