Leading the Charge

Scott Kennedy unwraps the state of US-China relations

Scott Kennedy Quarterly Cover.jpg

Key Takeaways

  • Both the US and China need to modify negotiation positions to resume constructive talks.
  • Years after China's WTO accession, the grand bargain that had undergirded the US-China relationship has totally collapsed.
  • There is uncertainty across every sector, even those that seem totally innocuous and non-strategic, like consumer goods.

 

You’ve been on record as being pretty pessimistic over the past few months with regard to the future of the US-China relationship. How are you feeling these days?

Since the trade talks broke down and the US used the nuclear option on Huawei, the Chinese are retreating into a nationalist corner. And so I’m not very optimistic about the prospects for the relationship through the rest of the Trump administration. It’s going to take significant political leadership on both sides for them to be willing to soften their respective positions to find any common ground or for the relationship to achieve some sort of stability, let alone progress.

So there’s no real possibility of making progress unless the administration changes in the US, or others over there could get things back on track?

I think it would require both China and the US to modify their basic negotiating positions. China has offered a significant amount of concessions in trade negotiations, but withdrew a significant portion of them without notice and without sufficient explanation, which is why the United States responded with retaliatory tariffs. And now the Chinese are going further, with their “unreliable entity list,” some harassment of American companies and organizations in China, and warnings to Chinese tourists and students to reconsider their plans in the United States.

In the US, the stalemate in the commercial talks created an opportunity for those concerned about American national security to push their pet issues, one of which is Huawei. We now have nationalist hawks dominating policymaking on both sides, and both the Americans and Chinese believe they have the upper hand. So, until you have policy that’s not made by hawks and each side feels more vulnerable, I don’t see the relationship turning around.

In any kind of negotiations, there will be ups and downs. But is this to be expected or do you think we’ve seen a fundamental change?

These aren’t standard negotiations. Yes, talks wax and wane and there are moments of slamming one’s fists on the table, threatening to walk away, or walking away and then coming back. But the way these talks broke down suggest that there was not a political consensus in China for the concessions that they had originally made, or that Xi Jinping wasn’t going to push to maintain those concessions that they had offered.

At the same time, the United States hasn’t been ready to lower its demands to what China would find politically acceptable, and so the gap that existed at the beginning of the talks is still there. China is willing to make token modifications in a gradual way, in a process in which China is the only arbiter of whether China has made those appropriate concessions, and the United States wants China to make much further adjustments with its economic policies, at a more rapid pace, in which the US gets to be judge and jury of China’s changes. So once all politically important voices on each side have had a say, this is not a negotiation that has made fundamental progress. That’s why the US showed its frustration in terms of going to the next round of tariffs, which the Chinese probably didn’t expect.

Now that the US has taken the two major actions against Huawei – China’s most successful company – putting Huawei’s very future in doubt, and preparing actions against other Chinese companies and other kinds of policy steps against China, I find it difficult to see the negotiations resuming soon without direct intervention by Presidents Xi and Trump, accompanied by a clear demonstration on both sides – particularly the Chinese side – for willingness to make substantial concessions to address US concerns, so that’s why I don’t think this is typical.

Let’s put this in some sort of historical context. Where are we on the timeline of US-China relations in terms of a high and low points?

High points would have been when China entered the WTO and the first five years of its membership – the “honeymoon” era – in China reduced tariff and non-tariff barriers and American and other multinationals moved a great deal of investment into China. They began to modify global supply chains, which benefitted everybody. The implementation of WTO commitments wasn’t perfect by any means and there was certainly a lot of frustration with regard to specific commitments, but the overall tenor of the relationship was positive, and that was helped by the fact that the US was focused on responding to 9/11 and making the War on Terrorism its chief foreign policy focus.

We’ve fallen quite a bit away from that point. We’ve had the global financial crisis, the Snowden revelations, other types of tensions in the US-China relationship, the election of an iconoclastic political leader in the US, the rise of Xi Jinping, the end of the Era of Reform and Opening, and the start of the New Era in China. The grand bargain that originally undergirded the US-China relationship has totally collapsed. Although there is still a very large commercial relationship encompassing trade, investment, people-to-people ties, and innovation, it is really hanging on by a thread.

We’ve got very little political support in the capitals of either country for a deep integrated relationship. China doesn’t want to open up because of the vulnerabilities to their economy and some of the important components of their political system, such as those related to information and state-owned enterprises. The US is deeply concerned about China’s strategic ambitions, the theft of intellectual property, the negative consequences of state capitalism, including overcapacity, and what that means for the US and global economies.

Since the US pushed the button on Huawei, that really takes us into a whole other level. The actions against Huawei are not an incremental adjustment that should be included in a long list of things that the US is doing. It’s a fundamental statement about the relationship and about the rules of the game. Things can get worse. The actual overall levels of trade can shrink considerably, the amount of investment flows can fall even more than they did last year, people flows could also slow dramatically, which they haven’t yet.

Certainly, the US could decide to radically restrict the visas to Chinese students and Chinese workers in the US. China could also do the same with visas on its side. The Chinese also could begin to harass more American companies or take actions against several high-profile companies. The US could do the same, and so this could be a messy divorce, with an immense amount of collateral damage strewn across the globe that could affect everybody.

Are there any winners globally in this ongoing dispute? What about Japan? Are there opportunities for Europe or for anyone else?

Certainly, in the short term, the Japanese have shown a great deal of leadership in trying to protect the liberal international order, by implementing the Trans-Pacific Partnership with only 11 countries and trying to induce others to join. The Europeans and others have helped as well with climate change, as the Paris Accord is still moving forward. As US businesses face greater challenges in China, because of tariffs and other non-tariff barriers, there are greater opportunities for companies from other countries to fill in the gap, and the Chinese have certainly tried to make that clear.

Those people who are most concerned about national security and about sending a message to the Chinese will feel that the current situation is not as dire as some would predict and it’s appropriate that the US has finally stood up and defended itself from Chinese actions. From their perspective, they have headed off a far worse situation. On the other hand, there will be lots of losers over the medium and long term. A global economy that is far more fragmented is going to be less efficient, there will be higher costs of production, less innovation, less financial stability and more volatility in the markets. All of this is going to hurt everybody.

The short-term winners would have more market share, but operate in smaller markets than would have otherwise been the case. That’s not to say the US should not have taken action against China. That’s not true. China’s policies were unacceptable, and needed to be more intensively challenged, and so Beijing deserves a lot of the blame, but that doesn’t justify any action. The US could have acted much more smartly in this economic conflict than it has. There are still things that can be done, but the current trajectory isn’t good for anybody, even the short-term winners.

AmCham China has been preaching to both sides the importance of keeping issues in their respective lanes, but it seems like this has been muddied on both sides. What’s your view on the crossover of issues here, and the importance of keeping issues clearly defined?

I agree with the general principle that keeping economic and national security issues in their respective lanes makes it easier to compartmentalize problems, and not let them affect the rest of the relationship when cooperation is feasible and both sides really want it. That applies to issues like regional hot spots, like North Korea, the Taiwan Strait, and the South China Sea, but when there is great concern about the overall direction of the relationship, or when economic issues inherently have some national security  component to them, it’s almost impossible to fully keep everything separate.

The Trump administration has said that economic issues are so important that the US can’t move forward with a normal relationship with China without addressing these deep underlying economic concerns that are facing the US. In addition, some of the specific economic concerns that the US have are directly relevant for national security, most importantly in the telecom sector, where the internet has global reach. Chinese companies and business inherently reaches into the US and potentially threatens its national security. It’s very difficult to disentangle those two things and so in the telecoms sector, both national security and economic concerns are deeply intertwined and hard to entirely disentangle.

It would be the same with banking. Doesn’t China have more access and operations to the American banking system and securities markets? These are America’s national security concerns. Why can’t Facebook and Google operate in China? Well, China has domestic security concerns. Both sides have certain concerns which put restrictions on the relationship. The US concerns are newer, the Chinese concerns have been there for a long time, so some feel like they’re baked in and should just be accepted, but they’re all there and difficult to disentangle.   

One of the most important issues that is under appreciated in Washington is the importance of global collaboration. The US challenges in China are faced by everybody else. Everybody faces the same dilemmas operating in China, with the consequences of China’s economic model globally. If you’re in autos, China’s efforts in electric vehicles affect you everywhere. If you’re in solar, robotics, or AI, China’s approach affects everyone.

A big reason why the US and China are at loggerheads and negotiations have come to a deadlock is because the US has not collaborated effectively with everyone else who faces the same challenges. There is extensive coordination with the Japanese and the EU on some specific issues, but the US has not been willing to collaborate in international organizations or via the TPP and that has put the US at a huge disadvantage and really given China a lifeline, which has made them much more willing to be resistant to the calls for reform that the US has made, and I think that’s as big a reason as any why we’re in the place that we are.

What specifically can AmCham China do? What can we as a business community try to do to pave a better way forward?

I think you can make sure that the Chinese government knows exactly what American business concerns are, and that these are concerns shared by other businesses in China, whether they’re Europeans, Japanese, or Koreans. Make sure that the Chinese understand that the problems you’re raising are problems that everyone faces. More coordinated actions by different Chambers of commerce in China or different parts of the business community would be very helpful.

I also think it’s really important to let the US government understand what your top priorities are, things that they really need to get accomplished in any negotiation and things that are less important that can be addressed perhaps in other ways or left off the negotiating table. I think you also need to let the US understand what types of solutions they’re thinking of or sanction actions, what those would do for American businesses – positive or negative – being very explicit about the health or harm of any step the US takes.

I think you could also continue to explain to the American people the value of the commercial relationship, not just for the companies and their board members and stockholders, but for their employees around the world, including in the United States, and for American consumers. I think that those messages have been lost and need to be clarified. If business doesn’t step up and shout very loudly, no one else is going to be able to do that.

The last thing is that AmCham needs to continue to look far into the future, beyond any individual trade dispute, about what the shape of technology and business is going to be ten years out, and help American companies and everybody else prepare – whether that’s about business models, supply chains, areas of investment, or infrastructure – helping build a consensus around the ethics and values that should undergird the adoption of new technologies, whether it’s in autonomous vehicles, or pharmaceuticals, or parts of AI.

What are the biggest risks for companies going forward? What do you foresee in a worst-case scenario and what contingency plans should they be making?

It’s possible that the US and China will place tariffs across the board on each other’s goods, and that some high-profile American companies will be targeted and have their businesses in China fundamentally limited. Individual Americans that are on the ground in China need to be aware of the risks of operating in China should the overall strategic relationship fundamentally change and the Chinese decide that there is no opportunity for progress. Xi Jinping made a statement recently that the US and China need to both struggle and hug – and not just struggle – which means that we need to compete and cooperate. But if the Chinese decide that cooperation is not possible, and they fundamentally lose interest in the commercial relationship and the overall relationship, I think that puts American companies in a very vulnerable position across the board.

I have to say there is a great deal of uncertainty across every sector, even those that seem totally innocuous and non-strategic, like consumer goods. I think everyone has to have their antennas up, make Plan Bs – and those Plan Bs may end up becoming Plan As. To some extent, it’s going to be about following signals and to some degree it’s going to be about trying to provide signals to everybody else and provide leadership, because left to their own devices, Washington and Beijing are both headed in a dark direction.


This article was originally published in the second edition of the AmCham China Quarterly, an executive-targeted periodical focused on policy, business, and technology, driven by C-suite perspectives and insights. To subscribe or contribute to the Quarterly, contact our editor: jpapolos@amchamchina.org