COMMENTARY: Trade Is the Thread Holding Fragile U.S.-China Relationship Together

With Trump and Xi at odds on many fronts, this week’s talks provide a contrast to the horrors that coud lay await in the South China Sea.

Author: Mark Melnicoe   

The U.S.-China relationship, battered by disputes across an array of economic, political, and strategic fronts, now hangs by a thread. And that thread is the phase-one trade deal commenced early this year.

U.S. and Chinese officials held talks early this week on the deal's status so far – the only thing the two countries are talking to each other about. Even though progress is halting, the fact that talks are taking place at all signals that the world's two economic superpowers want to continue with their only tangible point of agreement. 

The pact's main provision calls for China to purchase $200 billion in American products above 2017 levels. It was negotiated before the coronavirus pandemic, of course, which has not made compliance any easier for China, given the economic fallout. According to the respected Peterson Institute for International Economics, the Chinese are going to have to pick it up in the second half of the year. They've purchased only about half of what they should have by the end of June – less than $50 billion worth of goods.

This week's phone discussions were headed on the U.S. side by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, and on the Chinese side by Vice Premier Liu He. These are the same principles that painstakingly negotiated the agreement. Liu has become President Xi Jinping's primary economic adviser and strategist.

Simmering Tensions on Multiple Fronts

The U.S. trade rep's office said talks centered on China's steps "to ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer."

 "Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement," its statement said.

China's Ministry of Commerce also was fairly upbeat, calling the dialogue "constructive" and aimed at "strengthening the coordination of the macroeconomic policies of the two countries."

And that was about it. So many points of contention are tearing at the fabric of U.S.-Chinese relations, it's hard to know where to begin. They include valid American criticism of China's heavy-handed application of the law in Hong Kong and its abuses of the minority Uyghur population in Xinjiang province. And they include largely unjustified and possibly illegal U.S. actions against Chinese technology companies, the latest of which effectively ban short video app TikTok and social media platform WeChat from the U.S.

The two nations have shut down each other's consulates in Houston and Chengdu, and the U.S. has put sanctions on Chinese officials and entities over human rights issues.

But the scariest dispute centers on the South China Sea, where things seem to be escalating toward a crisis. Since Xi came to power in 2013, China has increasingly laid claim to islands stretching south from Hainan island that lie closer to Vietnam, Malaysia and the Philippines than they do to China. They are in dispute, but an increasingly assertive China claims them all for itself and has built military facilities on several of them, including the Spratly Islands.

The U.S. deployed two aircraft carrier groups in the area for the first time ever last month, and China is now conducting military exercises there. Then this week it fired medium-range missiles into the sea and an American U2 spy plane overflew the area during a live-fire Chinese drill, an action that drew a strong rebuke from Beijing.

In short, the area is becoming a powder keg and one can easily see how a miscalculation could quickly become a disaster. With Trump and Xi at the helm, does anyone have confidence that cooler heads would prevail in a conflict? So far, the only real fallout has been U.S. sanctioning of 24 companies involved in the South China Sea.

China Opens up Financial Sector

There has been other progress on the trade agreement, especially as China opens its financial services sector to foreign companies. A number of Wall Street firms are directing a keen eye toward China's financial market that the Caixin news portal estimates are worth $45 trillion.

Two developments just this week illustrate how American firms are starting to rush in. Vanguard, a mutual fund behemoth, announced it is shutting its Hong Kong and Tokyo operations and relocating them to Shanghai, which will become Asia's top financial center in the not-too-distant future. "Our future focus in Asia is on the Chinese mainland," said a spokesman for Vanguard, which has $6.2 trillion under management.

Also this week, JPMorgan Chase (NYSE: JPM) said it would spend $1 billion to take full control of its mutual fund joint venture in China. Shanghai International Trust Co. agreed to sell its 49% stake at a 51% premium over its appraised value, Caixin reported. The deal will make JPMorgan Chase the first completely foreign-owned mutual fund company in China.

More such deals could be in the works, which might provide a small opening to improve the world's most important bilateral relationship. There's a lot to do, and a new administration would provide a start. Joe Biden's election would create a better climate because, while being tough, he would not engage in the harsh and sometimes crude rhetoric favored by Trump. That alone would offer hope.

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