[Michael Schuman] Why US and China can’t make a deal

By Bloomberg
  • Published : Feb 21, 2019 - 17:23
  • Updated : Feb 21, 2019 - 17:23

Optimism that the US and China can reach a trade deal is rising, with another round of intensive negotiations in Washington this week. What buoyant investors are ignoring, however, is that the talks have become a test of strength between the world’s two great powers -- or, more accurately, a test of how accurate each nation’s sense of its own strength is.

The inconvenient fact is that neither country possesses the power to impose its will on the other. The US is not on its own capable of compelling Chinese leaders to do its bidding, nor is China strong enough to shun the Western world. Until they face up to that reality, they’ll never be able to reach a lasting accommodation.

From what we know of the ongoing talks, the two sides have made progress on narrowing the US trade deficit through large Chinese purchases of American soybeans, microchips and other products. The two also appear to be making some headway on widening access to the China market for foreign companies. But, there’s still no sign of a breakthrough on “structural” issues -- US demands for major reforms in Chinese policies that Washington says are biased against US businesses, such as massive subsidies for favored Chinese companies and forced extraction of technology from foreign firms. This would be the real meat of any deal, the reforms that would fundamentally alter China’s economy and promote more market-based competition.

It’s hardly surprising that China would be reluctant to give ground, and not only because meeting US demands would require Beijing to overhaul the way the Chinese economy works. It’s also profoundly difficult to prod countries into doing what they don’t want to do through economic pressure.

Remember, North Korea has clung to its nuclear weapons even as international sanctions have strangled its economy. In 1973, when the Arab states imposed an oil embargo on the US in retaliation for its support of Israel, Americans chose to wait in long lines for gasoline rather than ditch their Middle Eastern ally.

Recent statistics suggest that trying to bludgeon China into submission with tariffs is also a losing strategy. January trade data, for instance, showed that China’s overall exports rose by more than 9 percent even as exports to the US dropped by 2.4 percent. In other words, as important as the US market is to China, the rest of the world matters, too. Even technology giant Huawei, facing a concerted US campaign to block use of its equipment in 5G networks, may still thrive by focusing on non-Western markets. Huawei’s global market share in smartphones almost matched Apple’s last year, according to research firm Strategy Analytics.

Meanwhile, China has been inflicting some trade pain on the US. Just ask American soybean farmers, whose shipments to China have plunged as its importers turn to Brazil and other countries amid the tariff war.

China has already ignored numerous “deadlines,” both real and threatened, over the past year without conceding. While the Chinese economy is indeed slowing, that has less to do with tariffs than serious problems within the domestic economy, such as high levels of debt, and the government’s attempt to mitigate them, most of all by controlling the expansion of credit.

At the same time, Beijing has fallen prey to its own form of self-deception. Chinese leaders show little sign of understanding the ire their predatory business practices have fueled across the world. And it’s not just the flood of cheap Chinese imports many countries face, or the hassles their companies encounter while trying to do business on the mainland. China’s censorship and surveillance regime at home and its state-led, subsidized agenda to dominate cutting-edge industries have increased worries about allowing the country access to advanced Western technology, closing doors to Chinese companies from New Zealand to Germany.

Perhaps authorities in Beijing believe China no longer needs access to the consumers and know-how of the West and its allies. But, with China still trailing the US, Europe and Japan in innovation and wealth, they’re taking a big risk with the country’s future. Huawei might be able to find new customers in Africa and the Middle East; it still needs US microchips for its products to work.

In both the US and China, the problem isn’t just arrogance. It’s isolation. Xi and Trump operate in self-created echo chambers. Trump has purged just about everybody from this White House who had a dissenting opinion on his trade strategy, while experience in foreign affairs is generally derided as old, failed thinking. Xi has fostered an environment of such fear that only the bravest of souls would dare speak their minds openly and honestly. Neither leader seems to take much interest in understanding the position of the other country.

A superficial trade deal won’t solve any of these problems, even if it temporarily calms markets. Tensions will continue until Washington realizes the folly of unilateral action in an altered world order and Xi recognizes how his subversion of global norms is turning much of the world against China. Each side is going to have to accept its weaknesses before they can forge a stronger relationship.

Michael Schuman
Michael Schuman, who is based in Beijing, is the author of “The Miracle: The Epic Story of Asia’s Quest for Wealth” and “Confucius and the World He Created.” -- Ed.