US-China problems run deeper than any trade deal can fix

Updated 2:59 PM ET, Fri February 1, 2019

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Andrew Coflan works for Eurasia Group's Asia team, focusing primarily on China's domestic economy and financial system. The opinions expressed in this commentary are his own.

Perspectives Tensie Whelan

After months of posturing and rising tensions, US and Chinese trade negotiators are finally at the table attempting to deescalate the trade war.

President Donald Trump's overwhelming concern is with the bilateral trade deficit, which has led China to offer significant purchases of US liquid natural gas and agricultural products. Some in the administration have far greater ambitions for these negotiations, including increased market access, better intellectual property protections for foreign firms operating in China, and reductions in state subsidies for Chinese firms.
On Thursday, Trump tweeted, "China's representatives and I are trying to do a complete deal, leaving NOTHING unresolved on the table. All of the many problems are being discussed and will be hopefully resolved."
The stakes are high. Trump has vowed to increase tariffs from 10% to 25% on March 1 if a deal isn't done, harming US businesses and introducing significant volatility into markets.
How likely is it that an agreement in the next month will resolve those deeper tensions? Not very.
A deal on the tough issues would take years to implement, even assuming diligent efforts by Chinese officials, and would require comprehensive benchmarks and enforcement mechanisms. As a result, the most likely outcome of a meeting between Trump and Xi would be a framework agreement that lays out a comprehensive timeline to address the long-standing structural issues, and pairs Chinese purchases with a US pledge not to escalate tariffs.
To be sure, the likely best-case scenario, a comprehensive framework agreement, would go a significant way toward reducing bilateral tensions between the two countries. It would have an immediate benefit for American farmers, whose crops have been left unpurchased by traditional Chinese buyers. It would also improve the political environment for US firms operating in China.
    But even the most optimistic scenario for trade negotiations will not be able to address deeper issues that threaten to challenge bilateral relations for years to come.
    First is the increasing overlap between technology and national security. Case in point is the tensions over Huawei, one of China's largest telecommunications companies and a global leader in advanced 5G technologies. It is one of the few companies in the world able to provide the equipment necessary to upgrade national telecommunications backbones. But the United States has long pushed back against allies that allow the use of Huawei equipment in their networks, citing concerns that China may be able to use the technology for intelligence gathering. This campaign against Huawei took on a new dimension when the company's CFO, Meng Wanzhou, was arrested in Canada at the United States' request due to her role in violating Iran sanctions.
    The United States has been increasingly willing to use a broad range of tools to protect what it sees as vital interests in next-generation technologies — semiconductors, artificial intelligence, genetic sciences and advanced materials, among others. In 2018, the United States strengthened its investment review body — the Committee on Foreign Investment in the United States — which sharply reduced Chinese companies' ability to acquire US firms in key sectors.
    China, for its part, is not sitting still either. Despite the attention on industrial policy as a key irritant in US-China relations, Beijing continues to deploy its resources through "Made in China 2025" to subsidize the development of advanced semiconductors, aerospace technologies and other advanced industries, chipping away at American and European dominance. It has undertaken a concerted policy of important substitution, developing domestic companies that manufacture key industrial inputs, such as semiconductors as advanced machinery to reduce reliance on foreign firms. And it has reacted aggressively to the arrest of Huawei's CFO, detaining two Canadian citizens, including a former high-ranking diplomat, on weak legal grounds.
      A deal seems to be in the works. But relations between the two countries will have to find a new equilibrium on shakier foundations.