Comprehensive Economic Dialogue
After a full day of negotiations, the first US-China Comprehensive Economic Dialogue (CED) concluded on July 19, 2017 in Washington DC. Although part of the “100-day action plan” framework was unveiled at the summit between Chinese President Xi Jinping and US President Donald Trump held in Mar-a-Lago in April, the highly anticipated CED has delivered little.
Following the talks, both sides canceled a press conference and abandoned a joint statement, the first time this has happened since the two countries established an economic dialogue mechanism in the early 1980s. While the statement released by the US Department of the Treasury said that the two sides had a “shared objective to reduce the trade deficit,” the statement released by Beijing later merely recognized that the dialogue was conducted with a “candid and friendly spirit.”
As the two countries failed to reach an agreement to address their trade imbalance, there is a genuine risk that a trade war could break out between the world’s two largest economies.
To understand the significance of the CED, we need to put it in a historical perspective. In recent decades, as the economic and trade relationship between the US and China has become more complex, the two sides have established several mechanisms to conduct dialogue and negotiations on various economic and trade issues.
The first was the Joint Commission on Commerce and Trade (JCCT). Launched in 1983, the JCCT is now an annual dialogue, co-chaired by China’s vice premier for trade and investment policy and the US secretary of commerce along with a US trade representative. The JCCT took a major role in managing the disputes over intellectual property protection and helped to prevent a trade war in the 1990s.
In 2006, as China’s foreign exchange policy emerged to become a new focus of trade disputes, the US-China Strategic Economic Dialogue (SED) was launched, co-chaired by former vice premier Wu Yi and then US Secretary of the Treasury Henry Paulson. During the Obama administration, the SED and the existing US-China Strategic Dialogue were merged in 2009, forming the US–China Strategic and Economic Dialogue (S&ED). After being held for eight years throughout the Obama administration, the platform has gone beyond the currency issue, and provides a venue for the US and China to discuss various issues of global governance.
After Donald Trump assumed power, the S&ED was replaced by the Comprehensive Economic Dialogue. To a large extent, the mechanism has returned to the approach of the Bush administration, which separated economic issues from other issues in its dialogue with China.
The rationale is that as the relationship between the US and China has become more complex, the two sides need to separate economic issues from other issues so that officials from both sides can achieve concrete results and deliverables.
While the argument has its merits, the fact that economic issues are now intertwined with political and security issues means that economic dialogue alone is incapable of producing deliverables without agreements in the political and security realms.
For many, the failure of the first CED between the US and China was the end of a short honeymoon period for the US-China relationship following the Trump-Xi summit in April. To a large extent, the reasons aren’t just economic.
In the last couple of months, old issues have re-emerged to become focal points of friction between the two countries. Firstly, as North Korea continues to conduct missile tests, the issue has transformed from an opportunity for cooperation between Washington and Beijing into a new point of confrontation.
During the Trump-Xi summit in April, the North Korea issue was framed as a major area where the US and China shared common interests. However, as Pyongyang defied both the US and China and launched new rounds of missile tests, Washington and Beijing have resumed their mutual accusations regarding the issue. Not only has Trump escalated his criticism of China for failing to rein in Pyongyang, the Trump administration also imposed sanctions on two Chinese companies and two Chinese individuals on June 29.
In the meantime, the Taiwan issue, which caused serious concern when Trump took a call from Taiwanese leader Tsai Ing-wen shortly after his inauguration in early 2017, has re-surfaced to become a major sticking point. On the same day that the Pyongyang-related sanctions were announced, the Trump administration announced a $1.4 billion arms package for Taiwan. In the meantime, the US congress has been working on provisions to allow US naval vessels to make regular stops at Taiwanese ports, which has met strong opposition from China.
Since taking power, the Trump administration has implicitly connected trade issues with North Korea and the Taiwan issue, with many believing that Trump has been using these as bargaining chips in negotiations with China in the economic fields. As tensions regarding North Korea and Taiwan issues are brewing, this is inevitably having a negative impact on the economic dialogue.
Given the various challenges that may pose major threats to the bilateral relationship, China does have an incentive to take a proactive approach to addressing the trade imbalance. After all, with a trade surplus of US$347 billion against the US in the 2016, China has the largest trade surplus with the US of any nation.
But from China’s perspective, the best way to address the trade imbalance is to increase imports from the US, rather than to decrease exports to the US. One major potential area to increase imports from the US is the energy sector. As the world’s biggest energy importer, China should enlarge its cooperation with the US, which has emerged to become a major energy exporter with its revolution in shale gas.
There has been progress in the field in the past months. In the first five months of this year, China has imported 400,000 tons of US gas, up from zero last year. In the same period, China also imported an average of 100,000 barrels of crude oil per day from the US, 10 times the level for the same period last year
Another field of potential cooperation is the agricultural sector. China has become increasingly dependent on foreign countries to meet the rising demand for high-quality agricultural products. A major achievement in increasing imports from the US in the recent bilateral talks was China agreeing to open its market for US rice exports. In a deal recently signed between more than 20 Chinese companies and the state of Iowa, the Chinese companies agreed to import 12.53 million tons of soy beans and 371 tons of pork and beef worth US$5 billion.
But the area with the most potential to increase US exports to China is high-tech products, which Washington has imposed a strict ban on exporting to China. Beijing has long stressed that this is a major reason behind the trade imbalance between the two countries, an issue emphasized by China’s vice premier Wang Yang during the economic dialogue. In a speech addressed during the dialogue, Wang cited an op-ed by the Carnegie Endowment for International Peace last April, saying that if the United States were to liberalize its export barriers against China to the same level as those applicable to Brazil or France, the US trade deficit with China would narrow by up to 24 percent and 34 percent respectively.
However, given the strategic distrust between the two countries, rolling back the ban on advanced technology is politically out of the question for Washington. To a lesser degree, cooperation in the energy and agricultural sectors is also subject to the influence of political factors and strategic considerations between the two countries. Both sectors have major strategic significance, and cooperation in both fields goes beyond pure economic and trade concerns.
From this perspective, the so-called “comprehensive” economic dialogue between the US and China is far from such. Effectively addressing the trade imbalance, the two countries would require more expansive negotiation that not only covers economic issues, but also political and strategic concerns. Until then, the trade imbalance will remain for the foreseeable future.
Li Wei is a research fellow at the National Academy of Development and Strategy at the Renmin University of China and an associate professor of the university’s School of International Studies.