The spring skies over Beijing this past week were exceptionally clear and smog free. Not so the state of trade talks between Beijing and Washington, which had materially darkened by the end of the week with US tariffs coming into effect on another $200 billion of Chinese imports. US President Donald Trump had tweeted that tariffs would rise by the end of the week, in response to Chinese back-tracking on many points hammered out in a deal reached between the two sides last December. Talks held this week between Liu He, the Chinese vice premier, and Robert Lighthizer, the US trade representative, and Steve Mnuchin, the US treasury secretary, ended without conclusion. Just before the talks started, in a diplomatic cable, Beijing had made multiple edits to the seven-chapter, 150-page trade deal, primarily reversing its position on a change in Chinese laws that would be required for the previously agreed deal to be consummated.

Here is the long story that led up to this week. The US and China did not engage in normal diplomatic or trade relations from the Chinese Communist revolution in 1949 until 1971. In the early 1970s, a window opened up after a freeze in the Sino-Russian relationship following border skirmishes between the two countries in 1969. After a secret visit by US secretary of state Henry Kissinger, the People’s Republic of China was recognized by the United Nations and the permanent Security Council seat held until then by Taiwan was transferred to China. US president Richard Nixon visited China in 1971 and US president Jimmy Carter established full diplomatic relations with the country in 1979. US president Bill Clinton signed the US-China Relations Act of 2000 that paved the way for China to join the World Trade Organization (WTO) in 2001. China maximized its WTO entry with remarkable zest and effectiveness, rising to become the second-largest economy after the US by 2010 and also the largest foreign creditor to the US in the process.

China’s foreign trade has risen from $20 billion in the late 1970s, when reforms began under chairman Deng Xiaoping, to about $475 billion as it entered the WTO. Since then, it has grown 10-fold to about $4.5 trillion in 2018. Foreign trade is about 35% of the country’s gross domestic product (GDP) and China runs an overall trade surplus (goods and services) of about $300 billion a year, though that has been declining in recent years (with all countries except the US). In bilateral terms, the US imports nearly $600 billion from China and had a record bilateral trade deficit (goods and services) of $378 billion in 2018. One of the significant areas of international exports from China has been telecommunications equipment. In particular, Huawei, a company founded by Ren Zhengfei with historical links to the Chinese military, threatens to dominate exports of 5G telecom equipment.

Since the early 1980s this expanding trade and a corresponding increase in foreign direct investment into China have allowed it to dramatically increase military spending.

From the US point of view, the nub of the issue is a large and increasing bilateral trade deficit, denial of reciprocal access to many sectors like finance, insurance, retail and technology, a relaxed policy on intellectual property (IP) that includes transfer of technology to local joint venture partners; and a dramatic multi-decade increase in military spending that appears incompatible with China’s stated desire for a peaceful rise. Until Trump’s use of unusual tactics, the US legislature and government have not been able to get China to the table to discuss changes in its reciprocity and approach.

From China’s point of view, the US seems to be altering the status quo and in a hurry to make changes. China points to evidence that it has been making gradual changes in market access and improvement in policing infringements on IP rights. China believes that the US has suddenly injected a geostrategic dimension to its rise, and it is that paranoia fed to the domestic electorate that is informing the recent trade discussions. Both sides have a point, though the Chinese with speed and alacrity appear to have exploited the trade opening with the West since WTO to gain both an economic and a strategic advantage.

In Beijing this week, the prognosis was that a trade deal would indeed be reached in the next couple of months. The logic was an imperative on both sides: the Chinese have little choice but to continue exports to the West while rebalancing their economy and the US has little choice but to import from China many of the items it already imports (there are no alternative suppliers at that scale anywhere in the world).

The rebalancing of the Chinese economy towards consumption and diversification of supply chains for the US have begun, but that will take time. Unlike the cold war, the extent of the trade and creditor relationship between China and the US is significant and therefore both sides have a lot to gain by moving forward.

That said, the US-China relationship, both in trade and strategic terms, will define the geopolitics of this generation. Even as the skies clear above Beijing with its increasing focus on the environment, the relationship between the superpowers will oscillate between cloudy and partly sunny.

P.S. “Victorious warriors win first and go to war, while defeated warriors go to war first and then seek to win," said Sun Tzu in The Art Of War.

Narayan Ramachandran is co-founder and Senior fellow at the Takshashila Institute

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