Geopolitical

Unravelling the U.S. - China Trade Dispute

Author: Erik Brown, Research Analyst, Global Risk Institute

Download the Full Report:

  icon of PDF file with down arrow

U.S. China Trade Brief


Introduction

Having advocated a hard line on China in the 2016 election, President Donald J. Trump has directed a trade campaign designed to pressure Beijing to increase its imports from the United States and implement structural reforms. His strategy thus far rejects the course taken by Washington for nearly 50 years. Since Richard Nixon first opened relations with the People’s Republic in the early 1970s, the U.S. has operated on the assumption that greater political, economic, and cultural interconnections would help to shape Chinese policy in line with American preferences. [1] U.S. efforts to build a positive bilateral economic relationship included the decision to support Chinese admittance to the World Trade Organization (WTO) in 2001,[2] a milestone that spoke to Beijing’s own appetite for market liberalization.[3] However, China’s political and economic behaviour upon its accession to the WTO did not change to the extent that Washington expected. China failed to democratize or fully open its market to foreign participation,[4] and many of the promised benefits to the American economy did not materialize.[5] For some time, U.S. businesses and policymakers tolerated discriminatory economic practices because they deemed market access in China too lucrative to abandon, and pushed for incremental rather than large-scale changes to the incumbent system. Attitudes have since shifted as once tolerable barriers-to-entry are framed in more critical terms.[6] In this context, the ongoing trade dispute reflects an effort to recoup the promised, but as of yet undelivered, benefits that first animated U.S. support for China’s incorporation into the global trade system.[7]

For the Canadian financial services industry, the trade war presents complex and ambiguous risks. Punitive tariffs and general market uncertainty induce volatility, disrupt supply chains, and disincentivize new investment in the short-term. The dispute also creates a more protracted challenge in that it holds the potential to shape the future political relationship between the U.S. and China and thus the global economic system over the long-term. In anticipation of a concrete agreement, financial institutions should understand the context of the trade tensions, and begin to grapple with the interests and objectives of the two parties. This information can help risk managers to map out the probable terms of a deal, should one emerge.


Footnotes

[1] Kurt M. Campbell and Ely Ratner, “The China Reckoning,” Foreign Affairs, March/April 2018, https://www.foreignaffairs.com/articles/china/2018-02-13/china-reckoning.

[2] Ibid.

[3] Elizabeth C. Economy, The Third Revolution: Xi Jinping and the New Chinese State (Oxford, UK and New York: Oxford University Press, 2018), 103.

[4] Campbell and Ratner, “The China Reckoning.”

[5] Gabe Lipton, “The Elusive ‘Better Deal’ With China,” The Atlantic, August 14, 2018, https://www.theatlantic.com/international/archive/2018/08/china-trump-trade-united-states/567526/.

[6] Campbell and Ratner, “The China Reckoning.”

[7] As alluded to by Lipton: refer to Lipton, “The Elusive ‘Better Deal’ With China.”