When a moving train decouples, there’s danger ahead.

Which is why decoupling is the wrong word to describe the trade conflict between the United States and China.  

What’s actually happening is that bi-lateral trade is being rebalanced, correcting inequities that have long favored China.

The Phase One agreement that was signed January 15th is a big step in the right direction. It promises a diminution of China’s theft of intellectual property and forced technology transfer. In return US tariffs will come down as China resumes larger scale purchases of American products.

The culprit is the destabilizing $370 billion bi-lateral trade deficit. The aim isn’t its elimination, merely a significant reduction.

The December 13th accord was crafted during tortuous negotiations that went on for over a year.  It  suggests that Washington and Beijing are finding a way to communicate despite strikingly different political structures. US Trade Representative Robert Lighthizer says the extent to which  China keeps it promises will reveal whether reformers or hard liners are running things in Beijing.

Trade specialist Robert Atkinson credits President Trump with blowing the whistle on unfair Chinese practices ignored by presidents Obama and the second George Bush. “He has awakened America to the Chinese threat and that game changer will endure no matter who wins the presidential election.”

At a South China Morning Post conference in New York (Dec.10th), Daniel Russel of the Asia Society Policy Institute called both presidents Trump and Xi economic nationalists. “There are parallels,” he said, between Trump’s Make America Great and Xi’s China Rejuvenation.” But, he continued, “neither president is crusading to export those policies.”  Both narratives are nationalistic and make technological leadership a top priority. 

China, of course, does not play fair. Any first-time visitor to China quickly encounters the Great Fire Wall that restricts internet access. Select Google on your laptop and it’s not there. Similarly, there’s no Twitter, Facebook, gmail, YouTube, Wikipedia, New York Times or Washington Post.

Carnegie Mellon professor Lee Branstetter says through its Made in China 2025 initiative Beijing “pursues an aggressive industrial policy that seeks to exclude, expropriate, and overtake foreign firms.“ China, Branstetter continues, “restricts foreign investment in industries deemed strategic….and remains the most digitally protectionist major economy in the world.”  

Pat Bajari, Amazon’s chief economist, criticizes China’s data localization law, which prohibits the export of data from China.  That statute may be partially behind Amazon’s decision last April to eliminate third party selling on its Chinese website.  Amazon is a bit a player in Chinese online shopping.

Historian Niall Ferguson at Stanford’s Hoover Institution believes that since 2018 China and the United States have been engaged in a cold war reminiscent of the long US Soviet confrontation that persisted until 1989. By pushing back against growing Chinese influence, Ferguson says Trump brought two decades of  “Chimerica” cooperation to a screeching halt. Like Atkinson, Ferguson believes US policy makers were asleep during the decades China surged ahead. 

The next and most important battleground is technology, specifically 5G mobile telephony.  Huawei in Shenzhen is the global leader and the target of US charges of technology theft. Its chief financial officer and the daughter of the company founder has been under house arrest for a year in Vancouver. 

Adam Posen of Washington’s Peterson Institute for International Economics is furious at the Trump’s administration assault on Huawei.  He accuses the president of launching a tech cold war against China.

China professes to be a responsible participant in the global economy and is moving gradually to adhere to free trade rules. It has also introduced market-based reforms including more transparency, market pricing, reduced control over the currency’s exchange rate, and allowing foreign firms a greater say in joint ventures and increased participation in capital markets.  Tesla recently became the first foreign company to be granted 100% ownership of its Chinese subsidiary.

Which way is China heading? Author Nick Lardy, the respected China watcher at the Peterson Institute, isn’t sure. He entitled his 2019 book on China’s economy, The State Strikes Back: the End of Economic Reform in China? while his 2014 book was Markets Over Mao: The Rise of Private Business in China.  Lardy says since President Xi assumed the top job in 2013, China’s economy has become increasingly state-directed. 

Martin Wolf, chief economics commentator at the Financial Times, argues that these two largest world economies are doomed to cooperate.  There’s too much at stake. Their bilateral trade—even with tariffs– exceeds $750 billion annually. The US is China’s biggest export market while China follows only Mexico and Canada as a market for US exports.  Millions of jobs in both countries depend on bilateral trade.

No matter how you look at it US China trade is not decoupling.  Phase 1 is an impressive start but harder challenges remain. #