Craig Allen: Trade Issues and U.S.-China Relations

Editorial’s Notes: The Carter Center and the Chinese People’s Association for Peace and Disarmament jointly organized a virtual dialogue to commemorate the 42nd anniversary of the normalization of U.S.-China relations. Craig Allen, President of US-China Business Council, is one of the speakers at the webinar called “U.S.-China Engagement: Past Achievements & Future Adjustments”. (Click HERE to Access the Full Webinar.)

Thank you. It is an honor for me to speak with this distinguished panel of experts.  

In Washington DC, we have recently seen a transfer of power from one party to another.  

For the previous four years, the United States experimented with populism – tinged with an angry nationalism, complete with anti-foreigner, anti-elite, anti-institution, and anti-science sentiments.  

This experimentation is of course associated with Donald Trump. But the fundamental problems associated with populism are much deeper. First, populism is seen everywhere. It concerns the structure of the social contract and very rapid changes in technology and society.  

So, with the election, some things have changed, and some have not.     

In the recent election, both the White House and the Senate have changed hands, leaving all Congress and the White House in the hands of the Democratic Party. This is a big change. Much about our governance will change.  

But we should not exaggerate or raise expectations unreasonably.  

• Polarization has not changed
• COVID has not changed
• Geopolitics have not changed
• Neither budgets nor trade deficits have changed
• Technology competition with China has not changed
• China’s policies greeting the Biden Administration has not changed, yet.

Also, we must remind ourselves that public perceptions in the United States about China are very poor; just as public perceptions about the United States in China are low.

Further, in the US, the new Administration will have to negotiate with the Congress which – while now controlled by the Democrats – remains very skeptical of China. I expect lots of China-oriented legislation in 2021.  

In addition, remnants of the Trump Administration are happy to criticize Biden if he makes any major moves on China.  

The Biden Administration has put in a very strong team of national security, foreign affairs, and trade experts. The entire senior team is very pragmatic, principled, and deeply knowledgeable about China.

But they must face a very skeptical public and a very skeptical Congress.  

On the general subject of trade, the Democratic Party is very divided. President Biden has made it clear that trade agreements are not a high priority. His cabinet members have said that they will keep the tariffs for the time being.   

Let us recall that the Democratic Party is made up of a coalition of interests, including:

• Labor unions
• Environmentalists
• Feminists
• Youth
• Ethnic Minorities 
• and Progressives.  

None of these groups are pro-trade. For the most part, they are anti-global and anti-trade.   

So, the Biden Administration will not want to prioritize trade agreements or rush to globalize. Rather, I expect relatively little activity in this field for the near term. However, foreign government leaders will not let them ignore the subject. They will have to make some decisions – even as the President has introductory calls with foreign leaders this week and next.    

The new team is very realistic. They understand that the economic architecture of Asia has changed with (1) the RCEP, (2) the EU-China agreement and (3) Belt and Road. They recognize that Xi Jinping was serious when he said that China may join the CPTPP.  

The new team recognizes that the relationship with China is fundamentally competitive, but they do now wish to be confrontational.  

Also, they wish to cooperate with China when possible. 

As the business community looks at this situation, I think that there are a few reasonable goals and objectives.  

• We hope that there is more stability
• Confrontation should be minimized
• National security should not be used as an excuse for protectionism
• Supply chains should be efficient, sustainable and flexible
• Government actions should be transparent and predictable
• Subsidies and inducements are better than tariffs and other distorting measures
• China should address its market access barriers
• China should rely on the market as the decisive influence, rather than constantly strengthening the Party and the State
• The lack of a level-playing field in China must be addressed
• Free markets are good. Trade is good. FDI is good. 

Both government’s articulation of these simple economic facts would be helpful.  

While the Biden Team’s trade policy towards China has not yet come together, I would advise the Biden Administration to approach China with a three-part plan:  short term, medium term, and longer term.   

• In the short term, keep the Phase One agreement and implement fully. It is valid for another year. 

• Within that period, one year, negotiate a Phase Two agreement with China, building (1) the EU agreement, (2) the May 2019 agreement and the (3) former BIT negotiations. This should be accompanied by a removal of all tariffs and counter-tariffs. I hope that a deal can be reached, at least in principle, by the time of the G-20 in Italy on October 30 or the APEC summit in New Zealand on November 8.  

• Following successful completion of the Phase Two agreement, both sides should enter into continued negotiations based on the CPTPP vocabulary, values, norms, and rules to negotiate a longer-term agreement that may lead to a WTO-plus arrangement.   

I am happy to discuss any of these proposals further. But, let me say a bit more about CPTPP, a subject that may be somewhat foreign to non-trade specialists.   

It is true that President Trump withdrew from CPTPP in 2017. This is generally recognized as a strategic blunder. But the past is past. There are no do-overs in life or in politics.  

At the same time, President Trump adopted most of CPTPP’s rules and regulations when he abolished NAFTA and adopted USMCA. USMCA was a modernization of NAFTA. But it is based almost entirely on CPTPP.  

So, it would not be too difficult a lift for the US to rejoin the agreement – politics notwithstanding. The politics of this are too difficult for 2021 and maybe 2022. But, perhaps after 2 or 3 years, we can move in this direction.  

Both Xi Jinping and Li Kechiang have said that China wishes to join the CPTPP as well. This is an excellent idea from a strict economic perspective. It clearly will facilitate China’s next stage of development. However, I do not think that China can join the CPTPP without major changes that are going to take at least a few years.    

Both China and the US joining the CPTPP would be an extremely ambitious undertaking.  

However, in the three-to-four-year time frame, it is not impossible, and it could deliver great benefits.  

So, I think that it is very helpful for the US and China to use the CPTPP vocabulary, norms and agenda to shape the discussions going forward.  

This discussion would inform and contribute to global trade regulation, reforming the WTO.  

It would be economically good for either country to join CPTPP.  It would be best if both countries joined CPTPP and used the CPTPP as a new paradigm for trade and investment – both regionally and globally.     

Let me conclude by saying that most sane people, unlike me, are not fixated on trade or economic policy. I understand that there are many other important issues in the relationship.  

While that is true, I would also argue that if we do not find a modius vivendi on trade, we will never be able to address those other issues. Economics is a foundation. If that foundation is not sound, the entire edifice is unsound.  

That is not something that we should allow. Thank you. 

Q&A Session

Q: How will U.S. and China address the economic relationship in Biden Administration, especially regarding the first phase trade agreement of the two countries? How will two countries move forward?

Craig Allen:

Thank you very much for the question. I think that the Biden Administration is carefully looking at his options, and also discussing with allies, friends and partners around the world where collaboration might be a useful way forward. 

I very much appreciate Long Yongtu’s commitment to multilateral principle and multilateralism, and I think that you will see a difference in the approach of the Biden Administration towards WTO and multilateral institutions which I think we will all appreciate. At the same time, I am not certain that those institutions will be strong  and fast enough to deal with 21^st century issues, such as cyber safety, big data, medical research and many other technological problems. So I think that we should all be grateful that Vice Premier Liu He and President Trump signed the Phase One Agreement about a year ago. The agreement gave us a steppingstone, a foundation, a pathway forward. It’s a good agreement, and it gives the two countries a way to discuss not only the trade issues but other issues as well. And that foundation currently is more important than ever, so I’m hopeful that the two governments will recommit to that agreement: The Chinese side will make the purchases they’ve committed to, within the term of the agreement, and then we can move forward that is in the interest of both China and the United States. And I’m certain that it will contribute to sustainable Chinse economic growth in the months sahead. It is complementary to China’s reform agenda and necessary for China to become a fully modern country ahead of the middle-income trap, which is a real danger. So we must move quickly on the economics, bilaterally, regionally, and multilaterally. All of those negotiating forum should be used to address the economic issues. Thank you.