By Scott Kennedy —
The drama that is U.S.-China relations added a new episode in Buenos Aires this weekend. The outcome was in many ways anti-climactic, as the two sides reached the most limited of agreements: to postpone new tariffs for 90 days in exchange for vague Chinese promises on imports and Fentanyl and a commitment to renew negotiations. This result was far more likely than the other two options; there was not going to be a major deal since China’s only formal offer, put forward in mid-November, fell far short of the mark, and neither side wanted a big downturn in financial markets that would have resulted had talks outright collapsed.
Hence, some commentators are calling this a stalemate that just kicks the can down the road. And others are even suggesting Beijing won. There are reports that the Chinese delegation was exuberant over the outcome and felt they came away as the victors since they escaped without making any hard and fast promises. The two sides issued quite different interpretations of the discussions. China’s perspective can’t be conclusively contradicted since there was no formal joint statement.
All true, but the Trump administration should feel more reassured about the outcome in Buenos Aires than the Xi regime. The most important reason is that in the larger meta-fight about how to define the relationship, the Trump administration is still winning. The Chinese are arguing that the status quo, bilaterally and globally, is broadly acceptable and that any differences should be worked on without disturbing the many areas of constructive engagement. The Trump administration is arguing the opposite, that the problems are so fundamental that there must be changes in China’s approach to governance of its economy and foreign policy in order for the relationship to be stabilized. The deep worries about China’s behavior and trajectory are shared across the political spectrum in the United States and by many other countries in Europe, Asia, and elsewhere.
The dinner and the preparations in the weeks leading up to it did not in any way change the contours of the debate or leave anyone with the impression that Beijing understands the depth of international concerns and is prepared to address them. As a result, the downward trajectory of the relationship will continue. The United States, as well as Japan and the European Union, will continue to move full speed ahead to expand investment restrictions and export controls that limit Chinese access to advanced technologies. Washington will likely take other steps in response to concerns about Chinese efforts to influence U.S. opinion, as well as develop a larger strategy in response to China’s growing military might and its activities in the South China Sea and elsewhere.
China’s case was not helped by its apparent offer to reconsider the Qualcomm-NXP deal. To the contrary, although that acquisition cannot be resuscitated, Xi’s comment reveals in plain sight that Chinese antitrust policy is inherently politicized, with the top leadership able to shape outcomes to suit their own needs regardless of the facts of any case. This new data point reinforces the impression China’s leaders are not stewards of a competitive market economy.
The only concession China obtained was a momentary delay in additional tariffs. And that does not necessarily count for much since the Trump administration likely wanted to avoid new tariffs right now given the potential dampening effect such news could have on holiday-season spending. China literally bought itself some time, and it will need to come through on those promised purchases as well as engage in substantive negotiations before the United States has to do anything else.
If Beijing wants to use this purchased time well, it will take a series of major steps to persuade the global community and its own private sector that it is fully committed to building a true market economy. Xi Jinping’s speech at the April 2018 Bo’ao Forum and last month’s China International Import Expo did not come close to providing that kind of reassurance. The best opportunity China now has to change course on its own terms will come in two weeks with the commemoration of the 40th anniversary of the famous December 1978 Third Plenum, when the Reform and Opening Era was officially kicked off.
China has toyed with the idea of “competitive neutrality” for state-owned enterprises (SOE), suggesting they should be treated no better in terms of access to credit and markets as private and foreign companies. Here is a golden opportunity for Xi Jinping to elaborate on this concept with specific policies that put true market disciplines on SOEs and expand the competitive opportunities for all kinds of firms. Given that non-state firms are three times as efficient as their state-owned cousins, it is in China’s own interests to move in this direction. In this regard, Xi could learn from one of the most important ideological aphorisms to emerge from the late 1970s: “Practice is the sole criterion of truth.”
This may not only be China’s best chance to reform according to its own calendar, but it may also be its last. Of course, nothing is impossible, but it would be hard to expect that should there be insufficient progress in negotiations by late February, the Trump administration would once again agree to just simply push back higher tariffs on existing products or potential new tariffs on additional goods. And an expansion of tariffs coming right before the opening of China’s annual legislative session could be particularly embarrassing for Xi Jinping. Hence, Beijing should see Saturday’s outcome not as a pardon but as a suspended sentence.
For its part the Trump administration should also see the coming months as a grace period it can use to get its own house in order and everyone on the same page. Ninety days is not a long time, and if it is to reach a major and enduring agreement with China, the administration should make an effort to turn its gang of rivals into a more collaborative coalition. Even with Lighthizer heading the negotiations, success may require a whole-of-government approach. Coming up with real plans on how to reform industrial subsidies, better protect intellectual property, eliminate ownership caps, and amend Chinese rules regarding data will require extensive discussions with Chinese counterparts that are supported by extensive inter-agency collaboration. Moreover, with half of Congress switching hands to the Democratic Party, the administration could actually use this new dynamic to increase congressional attention on a range of issues that bedevil the relationship in a way that could possibly give the administration more leverage in bilateral negotiations.
There is good reason to be skeptical that Beijing or Washington will use this new-found time effectively. If so, we will all be back at a similar intersection in the late winter, but we may have run out of road on which to kick the can. Yet should the two sides surprise on the upside and be up to the challenge, we could be witness to an unexpected breakthrough. Now that would be a drama worth watching.
Dr. Scott Kennedy is deputy director of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at CSIS. His most recent publication is China’s Risky Drive into New-Energy Vehicles (CSIS, November 2018).Follow him on twitter @KennedyCSIS. This piece first appeared as a CSIS Commentary here.
Dr. Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at CSIS.