The U.S. will never win a trade war with China

Earlier this week, U.S. and Chinese trade negotiators concluded two days of talks in Geneva and announced that they had agreed to suspend additional tariffs for 90 days, with both sides reducing tariffs by 115%.

It seems that the market prevailed, as the Nikkei stock average closed at its highest level in over a month the following day. In Japan, critics say that the administration of Donald Trump “initiated a game of chicken and then hit the brakes itself,” and that “even if stock prices recover, international credibility will not be easily restored.”

However, the U.S. administration's high tariff policy represents a political dispute with China, which is fundamentally different from questions of “international credibility” in trade. Critics are right that the U.S. started the tariff war, but once its economic damage became clear, Washington had little choice but to pull back.

But the same can also apply to China. As economic policy failures are only corrected by the market, both countries faced market backlash and decided it was best to make concessions.

That’s why it is too simplistic to paint the narrative that “the U.S., which stumbled in the early stages of the tariff war, has lost face, while China, which sees this as a ‘victory,’ is likely to gain confidence.”

To understand this issue, we must look back at the history of U.S. trade policy toward China since the Bill Clinton administration. Over the past 30 years of U.S.-China trade negotiations, few developments have been as distinctive as those under the Trump administration.

For sure, the 90-day truce is merely temporary relief. As long as negotiations continue as they are, the U.S. will not be able to win a trade war with China. This does not automatically mean that China will be victorious, but I do not think that Beijing expects to defeat the Trump administration in a trade war. China's strategy is more consistent, long-term and strategically thought out than the U.S. president's team realizes.

The Clinton administration, which had been torn between granting China most-favored-nation status on the condition of improvements in human rights, decided in 1994 to separate the two issues, and unconditional MFN status was granted to China. In 2000, the U.S. Congress approved permanent normal trade relations with China, and in 2001, the Asian giant officially joined the WTO, accelerating the globalization of the Chinese economy and expanding U.S.-China trade relations.

Faced with a sharp increase in the U.S. trade deficit with China, the Bush administration launched the Strategic Economic Dialogue (SED) between the two countries in 2006 to address issues such as trade imbalances, unfair trade practices and intellectual property rights infringement. The dialogue covered a wide range of economic issues, including macroeconomic policies, exchange rate manipulation of the yuan, intellectual property rights infringement and counterfeit goods. Still, no concrete results were achieved.

The Obama administration transformed the SED into the U.S.-China Strategic & Economic Dialogue, or S&ED, a comprehensive dialogue framework encompassing not only economic and trade but also diplomatic and security issues. Tough negotiations were held on “structural issues” such as preferential treatment for state-owned enterprises and forced technology transfer, as well as cyberattacks and intellectual property theft. However, China strongly resisted linking economic and security issues, and thus, the talks did not produce any concrete results.

The Trump administration, which championed the “America First” policy, strongly insisted on correcting the trade deficit with China and unfair trade practices, leading to a series of tit-for-tat tariff hikes between the two nations. Negotiations continued between Washington and Beijing, but they temporarily broke down in May 2019. The so-called Phase One Agreement was finally reached in January 2020, although China hardly made any substantial concessions on the “structural issues” demanded by the U.S., and the negotiations failed to bear fruit.

A consistent strategy

As is clear from the above, China's approach to trade issues with the U.S. has remained consistent over the past 30 years, with no significant deviations. Since the Clinton administration, U.S. trade negotiations with China have rarely achieved meaningful success and mostly ended in failure. Therefore, it is unlikely that the Trump administration will win the trade war this time for the following reasons:

The biggest reason is that while the U.S. has sought concessions from China based on the principle of “political and economic integration,” China has responded with “political and economic separation.” The Chinese side has consistently rejected any agreement that would undermine the “leadership” of the Communist Party.

Especially on issues related to the core of its domestic political system, Beijing cannot and will not make concessions to Washington. As a result, U.S.-China agreements have always been temporary, limited and superficial. The only concessions China has made have been largely symbolic, such as increasing purchases of U.S. goods or establishing consultation mechanisms.

Negotiating tactics

The Chinese side strongly opposes making the details of negotiations public, likely out of concern that any concessions to the U.S. would be exposed. China also dislikes the U.S. preference — especially under the Trump administration — for speedy, top-down agreements reached directly between leaders. This is because meetings involving the Chinese president, who must appear flawless, require meticulous preparation in advance.

Furthermore, those at the working level in China have no real decision-making authority. Therefore, no matter how skilled the U.S. negotiators may be, bilateral negotiations always drag on. And by the time a few years have passed, the U.S. enters a new election cycle and the negotiations inevitably remain unresolved.

These are lessons the world should have gleaned from the past 30 years of U.S.-China trade negotiations. The May 12 joint statement says, “The parties will establish a mechanism to continue discussions about economic and trade relations,” and, “as required, the two sides may conduct working-level consultations on relevant economic and trade issues.”

Discerning readers may understand. Naturally, no matter how many times such negotiations are repeated, the U.S. has virtually no chance of winning the “trade war with China.” There is no reason why this round of U.S.-China talks should be an exception.