Sanctions and squabbles shift global trade balance

Leaders hope that ASEAN members work closely together in order to mitigate US-China tensions. Photo: Shutterstock

Experts and business representatives from both the United States and China at a major forum in Alaska on March 20 said they expected a better dialogue mechanism on bilateral trade – a sector where the world’s largest two economies share mutual interests despite their disputes on political issues. However, the tense nature of the event showed that hope does not yet exist.

Although the US and China previously agreed on a ceasefire in their tit-for-tat through last year’s phase one agreement, both sides remain agitated and see the other as a key economic rival – a rivalry that was on full display at the forum.

“I had low expectations for Alaska and those expectations have been met,” said attorney Clete Willems, who served as a trade advisor to former president Donald Trump.

The exchange is likely an early taste of the tough battles ahead for President Joe Biden and his trade team – and at stake is one of the globe’s most valuable trading relationships.

China is currently the US’ third-largest goods trading partner with $558.1 billion in total (two-way) trade in 2019, according to the Office of the US Trade Representative. That massive trading volume supported over 910,000 US jobs as of 2015, with 600,000 stemming from goods exports and over 300,000 from services exports.

“I think the Chinese misread the situation with Biden’s team, and they thought these guys would come in and roll back all the Trump measures,” Willems added. “I think they’re finding out that that isn’t going to be the case.”

Yao Yang, dean of the National School of Development at Peking University said, “If the two countries really want to move forward, I think the next step is to negotiate, to get rid of those tariffs.”

He suggested that the US and China should negotiate some new rules that are unlike the current World Trade Organization rules.

A further breakdown in bilateral trade is deemed unaffordable. A recent report by the US Chamber of Commerce warned if tariffs were expanded to all trade, the GDP of the States could see a $190 billion loss each year by 2025 and as much as $1 trillion in the coming decade.

Hu Qimu, chief researcher at the Sinosteel Economic Research Institute, told the Global Times that with China attempting to further opening its market access, it is now time for foreign companies everywhere to reap the benefits from the huge and lucrative market.

“In the bilateral economic and trade relationship, China is not only a source of intermediate inputs for many mid- and high-end industries in the US, but also an important source of consumer goods for end-users in general. China is also a huge market for industrial goods and technology,” said Qimu.

The trade talks with China carry commercial importance, but also represent a chance to protect US national security interests and improve access to vital tech.

“The Biden administration has signalled that trade at all costs is not their position and that they will not curtail their views in order to have a ‘good’ trade relationship,” said Dewardric McNeal, an Obama-era policy analyst at the US Defense Department.

The previous US administration had made a habit of imposing punitive tariffs and sanctions to address complaints about China’s lack of intellectual property protection, required tech transfers, and other business practices.

It was reported on last week by Bloomberg that China is also well behind on the two-year targets set in its trade deal with the US, having purchased only about a third of the goods it said it would buy so far.

There was widespread scepticism that China would ever meet the promised targets, even before the pandemic broke out, damaging both the demand and the US’ ability to supply goods. However, it remains unknown if China will face any consequences if it does not meet its goals.

Although China’s Ministry of Foreign Affairs said trade was discussed by officials during recent talks between the two nations in Alaska, there was no specific mention of the trade deal or what both sides would do with the tariffs imposed during their dispute.

China has been raising imports of US farm goods since late last year, as it seeks to feed its recovering pig herd and make up for shortages of commodities.

Deal derailments

The US is not the only major economic power that China has to contend with. The EU last week announced the revival of the US-EU China Dialogue during a Brussels meeting between US Secretary of State Antony Blinken and EU foreign-policy chief Josep Borrell.

The move, reported by the Financial Times, represents a further step towards the Biden administration’s goal of creating a joint response to China’s rise.

A united position on Chinese policy looked unlikely at the end of 2020, when Brussels and Beijing agreed the EU-China Comprehensive Agreement on Investment – a deal designed to level the playing field for large European corporations by granting greater access to the Chinese market. At the time of the agreement, European Commission Ursula von der Leyen called it “an important landmark in our relationship with China.”

That status of the agreement is now uncertain after the EU imposed rare sanctions early last week on Chinese officials in Xinjiang. China retaliated strongly, targeting sanctions against several members of the European parliament. Those sanctions now risk derailing the investment deal, as the EU body has yet to ratify it.

The US, the EU, the United Kingdom, and Canada had all placed the sanctions on the Chinese officials on March 22, the first such joint Western action against China under the new US president.

The Socialists and Democrats (S&D), the second-largest group in the EU parliament, made clear the following day that China would have to lift sanctions on European lawmakers before it would consider any discussions on an investment deal. “Europe needs to trade with China, but our values and standards go first,” said Inmaculada Rodríguez-Piñero, the S&D’s lead member of parliament.

If the deal collapses, it could be more of blow to Europe’s manufacturers than China. “My feeling is that China doesn’t care if things take place or not – it’s just ticking a box,” Philippe Le Corre, a China expert at the Harvard Kennedy School, told Politico.

A united Southeast Asia

Despite the controversies and the prickly nature of the US-China diplomatic meeting in Alaska, leaders elsewhere insisted the renewed dialogue was a positive step.

Heng Swee Keat, Singaporean Minister of Finance, who is also tipped to be the next prime minister, called on both competitors to chart a constructive way forward following the talks.

“Despite the tough rhetoric, it is a step in the right direction,” Keat said at the Credit Suisse Asian Investment Conference. “The meeting showed recognition from both sides on the need for cooperation.”

Singapore has looked to navigate American efforts to counter China’s influence in Southeast Asia and is encouraging dialogue on common challenges such as the pandemic and climate change.

“It is important that they persevere, maintain open channels of communication, find a way forward to deal with their differences, and manage their tensions and frictions,” Keat said.

He added that Southeast Asia must continue to work with all parties, not just the US and China. Describing the principle of ASEAN centrality, Keat said the region must work as one to advance its collective interest.

“Should US-China tensions escalate, our region must firmly remain anchored on ASEAN’s own interest, and to keep ourselves open and relevant through practical steps,” he explained, saying the steps involve speeding up ratification of trade agreements and opening up further for economic transformation.

“The economies of Southeast Asia must seek to draw in more investments, as companies reconfigure their production bases and supply chains for greater resilience,” Keat added.

Given the increasing need for investment capital in the region and the expertise that investors bring, it is not possible or smart to rely on one source of investment. “We must therefore continue to welcome countries and companies from around the world to grow their presence here,” the minister said.

Kavi Chongkittavorn, writing for the Bangkok Post, also alluded to a type of isolation for Southeast Asia as a result of the disputes between the major economic powers.

“As Washington is still formulating its China policy, it is still too early to predict the future trajectory and whether the US frustrations with China on a wide range of issues could be replicated by Southeast Asian countries,” Chongkittavorn said.

He further noted that the future trade direction will hinge on resolution (or lack thereof) of a wide range of complex issues, from the US reaching a middle ground with Southeast Asia, helping to secure the future of the Mekong region, and its reaction to unrest in markets such as Myanmar and Hong Kong, among other factors.

“In just over 60 days of the Biden presidency, Washington has moved quickly to forge closer relations with allies and friends in the region, but it must not be a pushover,” Chongkittavorn explained. “One caveat is in order: the new US administration must not sow the seeds of discontent in the region using its bilateral problems with China.”