Opinion From rules-based negotiation to alpha male tactics: In US-China trade war, norms take a back seat
Trade negotiations were often bilateral, but conducted with rules in mind that required equal treatment of countries not included in the negotiations. Those principles no longer apply in negotiating with the US.
The phase of chest-beating and other dominance displays, which involved tariffs so high that trade between the US and China would have quickly ground to a halt. (File Photo) The US-China tangle over trade has sometimes seemed like an alpha-male exercise in dominance displays, especially on the US side – the human political equivalent of gorilla dominance displays such as chest-beating, charges and vocalisations. Gorillas rarely fight, and they never sit down to negotiate. In that sense, the US-China trade “war” has quietened down to what could be a relatively normal set of trade negotiations.
Trade negotiations are inherently complex. Modern economies produce and trade thousands of different products. International trade does not follow simple bilateral pathways, just as any modern economy does not depend on bilateral exchanges. Production networks that span multiple countries over different stages of a product’s manufacture make the pattern of international trade even more complex. Add to that the fact that trade in services has become increasingly important in recent decades, and that flows of capital, which balance deficits and surpluses in trade and services, have also grown. All of this has evolved because of a set of internationally-agreed-upon rules that were deliberately crafted over many decades following World War II. These rules provided stability and certainty, and promoted a climate of trust.
US-China trade negotiations will begin in a situation where trust has been eroded. Pausing tariff escalations for 90 days does not create certainty. In the pre-Trump era, there were targeted retaliations for perceived rules violations, such as “dumping” goods by selling them below cost, or through the use of government subsidies that were not allowed. But this was typically within the rules of the system and subject to appeal through the World Trade Organization. Trade negotiations were often bilateral, but conducted with rules in mind that required equal treatment of countries not included in the negotiations. Those principles no longer apply in negotiating with the US. The most problematic feature of the new situation, however, is the US focus on bilateral trade deficits, which ignores both the multilateral nature of international trade, and the importance of trade in services. The US has skilled, experienced trade negotiators, but if they are forced to pursue irrational objectives, the outcome cannot be a good one.
The phase of chest-beating and other dominance displays, which involved tariffs so high that trade between the US and China would have quickly ground to a halt, was abandoned by both sides to avoid the intense economic pain that would have occurred. But tariff levels in the new starting point for discussions are still relatively high. US stock markets have soared, but they may be underestimating the bite of the country’s new trade barriers, not only against China, but also the rest of the world. Stock market indexes also disproportionately represent the country’s tech giants, and small businesses in the US may still take a hit from 30 per cent tariffs across the board. The purchasing power of consumers in the lower half of the income distribution may be disproportionately curtailed.
What comes next? China’s bargaining position relative to the US has been mixed. Its economy was weaker, but its government less vulnerable to popular discontent. But given that it did not start the chest-beating and charging, it does appear that the US has backed off more than China, whatever the US president may claim. At a strategic level, China has also been working hard to catch up in various dimensions of the technological frontier, and, even for more sophisticated manufactured goods, it can be a formidable competitor globally. In that sense, the US is fighting the wrong war against China. The Trump administration’s other war — on American universities — will only help China.
Normally, trade negotiations take years, because of their scope and complexity. They mostly proceed under the radar, without too much publicity, and without direct political interference. The forthcoming US-China trade negotiations will be under a spotlight, and they are unavoidably highly politicised. It is likely that there will be a relatively quick deal, which involves some concessions from China (allowing the US to save face). The recent US-UK trade deal had this kind of flavour – superficially presentable, but lacking in depth. Meanwhile, China is going to continue pursuing its strategic ambitions of becoming a great power that rivals the US in more and more dimensions. China’s strategic intent has substance, whereas the US is being driven by the grievances and greed of its new ruling elite.
For India, the new phase of US-China trade talks represents a temporary missed opportunity. Some quick wins in its own negotiations with the US would have sent a positive signal. But the long run situation has not changed. India still has an important role to play as a counterweight and alternative to China for US firms. The catastrophic tariff levels that led to Apple’s announcement that it would shift iPhone production for the US market from India to China may be gone, but Apple’s move, even if it is slowed down and only partially implemented, still makes strategic sense for the company. To some extent, India has to focus more on establishing itself as a part of the most important global supply chains, and successful trade negotiations with the US, while needed, are not going to be the main determinants of future growth.
The writer is Professor of Economics, University of California, Santa Cruz
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