After eleven rounds of negotiations lasting almost one year, China and the U.S. were supposed to be reaching the finish line this month. Instead, the talks collapsed amid American charges of Chinese retrogression, tweets from President Trump, and an emergency trip to D.C. by Chinese negotiators. Having spent much of my professional life in Chinese trade negotiations and business development, I can relate that despite these twists and turns, much of what we are seeing is what we might expect — with one major exception. What are the takeaways from the talks?
1) Tariffs work. Politically, that is. This was the exception to normal U.S.-China negotiations. President Trump’s imposition of tariffs was a shock to Chinese leadership and a reminder not to take the U.S. for granted. President Trump gave the negotiations a jolt. We can debate how necessary that was, but in the absence of tariffs, I believe Chinese responsiveness would be minimal.
2) Tariffs don’t work. Economically, that is. Tariffs hurt the country that imposes the extra duties as much as it hurts the target country. The imposition of tariffs is a bet that the U.S. can withstand the pain better than China can. Regardless, the imposition of tariffs is a bit of a hollow victory. Alternative approaches were and are available.
3) All politics are local. The rigidities and insularity of the Chinese system can result in a Chinese tendency to overshoot, to try to wrangle better terms even at the risk of killing the deal or degrading trust. It is difficult in the Chinese system to advocate restraint, and it is cost-free to cheerlead for aggressive tactics. China could have won substantial goodwill — and helped its own economy — by showing greater responsiveness to the U.S. Instead, with retrogression in the talks, they signal that they see little value in shaping a win-win outcome, and more value in gaining advantage. For the Chinese negotiators there is a greater domestic payoff in showing defiance rather than in reaching an accommodation.
4) Demarcating issues helps. As important as the geopolitical and human-rights issues are, they do not normally belong in trade talks. The Sino-American relationship is perhaps the most complicated in the world, and if issues can ever be segmented, talks can take place in an orderly fashion.
5) Communications and positioning drive behavior. When the U.S. publicly signals that progress had been made, we might see that as a sign of goodwill while the Chinese might infer that they could game the process. Their (inaccurate) conclusion: The U.S. was so wedded to an orderly finish that there was no chance Trump would respond as he did. Yet Trump had shown for over two years that he is not concerned about being a disrupter and he is comfortable with turmoil.
6) Economic rationalism is subordinate to economic nationalism. Most or all of what the U.S. is seeking in these talks is in China’s interest. Lower tariffs, more competition, reduced government subsidies, lower inflation. China frequently praises the value of market economics, but when it is asked to move in that direction, nationalism combines with bureaucratic inertia and fear of the unknown to dominate.
7) Second-order effects are more significant than the tariffs. China and the U.S. will both have to grapple with downward pressure on their stock markets, and China will also have to deal with investment issues as multinationals look to alternatives to sourcing from China. Politically, both presidents have wide latitude in shaping bilateral policies, but persistent costs will create an undercurrent.
8) Triumphalism weakens chances for an outcome. China has to be able to “own” the outcome, to communicate to its constituencies that it is comfortable with the decision and that no particular concessions were made. (Get ready for: “For the most part, the agreement includes measures we had already publicly stated we would be taking.”) Pushing back on timing with Liu He’s departure from D.C. was essentially obligatory. China will also push back on tariffs even as they know that escalation is not in their interest. They can deliver a jolt as well, even if smaller. Trump enjoys public theatrics. China values a subdued passive-aggressive approach. Each side got what it wanted.
9) The U.S. needs alternatives. How can we reconcile the contradictions of the first two points (that tariffs help politically but hurt economically)? Reduce tariffs with other nations. This has the same effect as raising tariffs on China, but without costs for the U.S. economy. If the U.S. can develop an Asian trade agreement (remember the Trans-Pacific Partnership?) or a trade agreement with Europe, the U.S. will have that much more leverage with China. China might not be the only government grappling with nationalism over rationalism.