Escalations in the U.S.-China Trade War

Escalations in the U.S.-China Trade War

Thomas White/Reuters
from Member Conference Calls

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Speakers discuss what’s at stake in the current U.S.-China trade negotiations, motivating factors for both the United States and China, and the prospects for a reasonable solution to the trade impasse.

Speakers

Edward Alden

Bernard L. Schwartz Senior Fellow, Council on Foreign Relations; @edwardalden

Elizabeth C. Economy

C. V. Starr Senior Fellow and Director for Asia Studies, Council on Foreign Relations;@LizEconomy

Presider

Miles Kahler

Senior Fellow for Global Governance, Council on Foreign Relations; @MilesKahler

KAHLER: Welcome to today’s Council on Foreign Relations conference call on Escalations in the U.S.-China Trade War with Edward Alden and Elizabeth Economy. I’m Miles Kahler, senior fellow for global governance at the Council on Foreign Relations. And I will be presiding over today’s discussion. I’d like to remind all the members on the conference call that the call is on the record.

Let me begin by recapping very briefly where we stand in this conflict, which is developing as we speak. The economic conflict between the U.S. and China appears to have entered a new phase of escalation in the past week. Last year, the United States increased tariffs on nearly 50 percent of its imports from China. That was an increase in 2018 from 7.5 percent coverage in 2017. China retaliated with tariffs on more than 70 percent of its imports from the United States last year, and the United States announced that tariffs on an additional $200 billion of Chinese imports would go into effect on March 1 this year. And the existing 10 percent would be raised to 25 percent.

But as negotiations between the two sides continued, that increase we delayed by the Trump administration in February. But then again, on May 5, just a short time ago, President Trump announced that the United States would increase a 10 percent tariff on $200 billion of imports from China to 25 percent on May 10, which has gone into effect, indicating that he would shortly impose 25 percent tariffs on the rest of U.S. imports from China not yet targeted by the United States. If he did impose tariffs at this level, that would bring tariffs on Chinese imports, as Chad Bown at the Peterson Institute has indicated, to levels not seen since the Smoot-Hawley tariff of the Great Depression.

So all of this is taking place in the context of a wider trade war waged against other trading partners, not only the United States, which has threatened from widening from steel and aluminum to automobiles in the most recent announcements. In addition, there is scrutiny—heightened scrutiny of foreign investment into the United States and outbound transfers of technology from the United States, both directed against China. And finally, we have the war against Huawei, the Chinese telecom firm. An executive order yesterday effectively barred U.S. companies from using any telecom equipment manufactured by Huawei, without naming the company specifically. And in another action by the Commerce Department, Huawei was placed on the entity list of the department, which meant that U.S. firms must now obtain a license to sell technology to Huawei.

To make sense of this dizzying set of developments, we are very pleased to have two senior fellows at the Council on Foreign Relations—Edward Alden, who is Bernard L. Schwartz senior fellow at the Council on Foreign Relations. He is also the author most recently of Failure to Adjust: How Americans Got Left Behind in the Global Economy. And Elizabeth Economy, the C.V. Starr senior fellow and director for Asian Studies at the Council, who is the author also most recently of an excellent book, The Third Revolution: Xi Jinping and the New Chinese State.

So welcome Ted and Liz. My opening question for both of you, in an economic conflict, whether a trade conflict or a strike, settlement is often on terms favorable that occurs, or perceives itself as incurring, the lease economic and political pain. Is that likely to be China or the United States is this escalated trade conflict? Or will the pain be shared equally? Ted, do you want to start?

ALDEN: Sure, I’d be happy to. Thanks very much for that excellent introduction, Miles. And it’s great to be on the call here with Liz.

I think, you know, to answer your question fairly directly, I think China of the two countries will clearly feel the greater economic pain from an escalation in this trade war. China is obviously much more dependent on exporting to the United States than vice versa. And certainly the new actions, we’re going to see how they play out with respect to Huawei, could have some significant impact on one of China’s flagship companies.

China has a number of things that it can do to try to offset the damage of the tariffs, but I would suggest that the—you know, the U.S. quill is much bigger. The U.S. economy is in as good a place as it’s been for decades in terms of, you know, very low unemployment rate, reasonably strong growth, fairly healthy markets. I think we’ll definitely see some quavering, as we have, as a result of the escalation. But the U.S. is in a stronger position.

There are two things, though, that I think you have to keep in mind. One, from the U.S. end, the issue is not just sort of overall economic health, but the politics involved. And we’re heading into an election in 2020. The tariffs are going to have—already having, are going to have a more significant impact in important states, small manufacturers in Michigan, and Wisconsin, and Ohio. Farmers are obviously feeling the pain tremendously from Chinese retaliatory tariffs. So there will be some real politics around this, about what the impacts are going to be on states that are going to matter in the 2020 election.

The other thing I just want to say at the outset is just because one side of a negotiation—you mentioned the strike analogy—is in a stronger position doesn’t necessarily mean the conflict gets settled on the terms of the stronger side. There has to be something that can be portrayed as a win-win. And the Chinese have made this very clear. They’re not going to accept a deal that looks like an abject surrender to the Trump administration. And at the moment, that appears to be the only sort of deal that would satisfy this administration. So I think it’s quite possible that the outcome of this is no deal, because there’s nothing that would be acceptable to both sides.

KAHLER: Liz, do you agree with that assessment?

ECONOMY: Yeah, I mean, I think I agree with Ted, maybe all the way up until his last point. And I guess maybe I would insert slightly more politics into the discussion because I think, you know, your question appears quite simple but actually is more complex, right, once you dig down a little bit. Because I think it really depends on, you know, what the objectives are and, you know, how each side is defining winning, and sort of what’s the timeframe here. And I don’t think that there’s actually consensus on either the Chinese side or the American side, right, within either administration as to exactly what winning looks like.

I think we have a range of views on the U.S. side, you know, from people who would settle for more goods purchases, and greater market access, and IT protection, to those who are basically interested in a vast decoupling of the two economies. And on the Chinese side, I think there are those, you know, economic reformers like Liu He who would like to use the U.S. pressure to achieve a more market-driven and rules-based economy, including greater IT protection and more efficient allocation of capital. But then I think that there are, you know, others who, you know, are not interested in doing much. And those are of the people who are sort of trumpeting now this nationalist trope of, you know, we’ll fight to the end, and this is like the Opium War. We’re never going to give up power and, you know, we’re not going to be humiliated.

So I think that there are differences, you know, in sort of perspectives. And any agreement is not only a play between the United States and China, but it’s a negotiation, you know, within each of those countries. And let me make one other point. I think, you know, for the United States in some respects this has really been a thirty-year war, right? This is not just something that, you know, all of a sudden popped up under the Trump administration. The U.S. has been talking about levying trade sanctions against China since 1991, you know, over issues related to market access and intellectual property. And even, you know, less than a year after China’s accession to the WTO in 2001, the U.S. is challenging China’s compliance on IT protection and commitments around services and agriculture.

And so I think, you know, this—what we’re seeing now is really a lot of pent up frustration not just with—not just from President Trump, but I think more broadly from members of the U.S. business community, that as China’s economy has grown and developed certainly there have been more opportunities for U.S. companies. But those too have the opportunity cost for being denied a level playing field increased. So I think there’s a lot of politics, you know, at play here. And any agreement really is going to involve, you know, more than simply, you know, the numbers of—you know, IMF put out, right, a 0.9 percent drop GDP growth to the U.S. and 1.6 percent to China, you know, if we go to the full-out trade war. So I just put that into the mix as well.

KAHLER: So let me follow up. We can talk a little bit more about the politics on the Chinese side, because some of the issues that the United States has raised—and we’re not absolutely sure how significant they are on the U.S. negotiating agenda—are things like state subsidies, the role of the state-owned enterprises in China, forced technology transfer. And these appear to target really core features of China’s industrial policy and its development model, at least it’s emerged over the last years under Xi Jinping. Are these demands likely to be negotiable for the Chinese government? Or is there a way that they could be negotiating that would not appear to be surrendering what seem to be very core aspects of the Chinese system as it is currently configured?

ECONOMY: Right. So I think if you look at these issues, what you begin to see is that the politics that I sort of began to raise are playing out. Like, so take just the coerced technology transfer. So when I was in Beijing in January, I spoke with an official from the Minister of Finance who said that they had undertaken a study of two-hundred-odd companies and found that there’s no such thing, right, as coerced technology transfer. (Laughs.) It just doesn’t exist, and no multinational reported that they had ever been coerced to transfer technology in the sort of process of trying to do a deal. Nonetheless, we also saw at the very same time China drafting a new regulation that said: We—the Chinese government does not support coerced technology transfer, right? So then that was put out there, that even though it doesn’t exist the Chinese government is willing to say that, you know, we don’t allow this to happen, right?

Now we see that this idea of coerced technology transfer is somehow insulting to the Chinese government, right? So this is part of the—sort of the new—the most recent set of discussions. So I think, you know, you can watch as these things play out and begin to see that, again, you know, for the Chinese, things are not set in stone. I mean, we think that we’re chaotic, we have this chaotic decision-making process, and all these different perspectives. Just because we can’t really see behind the veil of what’s going on inside China doesn’t mean that there aren’t equally sort of vociferous debates taking place in that country.

Similarly, with purchases—(coughs)—excuse me—of U.S. goods, you know, every time I’ve got to China over the past year, the Chinese have basically told—this is a no-brainer. We’re happy to do this. We’ll buy as much as the U.S. wants. Now, all of a sudden, you know, one of Liu He’s comments is that the targets, you know, set by the U.S. for goods purchased by China is too high. So it’s possible that we all of a sudden dramatically increased it as, you know, the trade deficit has increased. But, again, this is something that they’ve talked about for a long time as being pretty much the easiest thing for them to respond to.

And then finally, on the issue of subsidies, certainly you’re right. I mean, subsidies, certainly you’re right. I mean, subsidies and other kinds of, you know, non-market barriers to entry, you know, the kinds that you see around Made in China 2025 for example, are at the heart of what China considers to be its—one of its greatest advantages, and essential to its economic development plan. But I would also point to, you know, comments by former minister of finance Lou Jiwei, who said—(laughs)—you know, that the Made in China 2025 was a waste of the taxpayers’ money, right?

So there are clearly economic reformers, again, within China—of course, then he was, you know, removed from his position. (Laughter.) But—and we haven’t heard from him since. But my point is only that I do think that there are these debates taking place behind closed doors. And, you know, what’s come out of the Chinese at this moment is a tougher line, but it doesn’t, to me, mean that there isn’t space for continued negotiation.

KAHLER: OK, thanks. So let me talk—Ted, let me ask you a little bit about the U.S. political side, because the debate here is not behind closed doors. It’s very much out in the open, in many respects. And it seems to be between those who want to strike a better deal with China—this is the original negotiating stance of most American administrations—create a more level playing field. China’s now kind of grown up. It’s a big economy. We have to have a more symmetric set of trade and investment relations with China, on the one hand. But now we have a group of so-called China hawks who wish to reverse the economic interdependence between the two economies, for both economic and strategic reasons. How do you see those viewpoints playing out, particularly as you mentioned this is—we’re going into a presidential and congressional election year in 2020? And how are they going to drive U.S.-China relations going forward? Whatever the outcome of this particular set of trade conflicts and trade negotiations? And what would be the costs and benefits for the United States in taking either of these positions vis-à-vis China?

ALDEN: So let me talk about the first. The second is a tougher question to answer, in trying to predict the economic impacts. But I think for a long time in this administration it was fair to kind of talk about two factions. One, I think—and this is one of the reasons, I think, that the business community was reasonably comfortable with the Trump administration approach—was the notion that there are a range of problems that U.S. companies face doing business in and with China. And the United States and other countries had not been very successful through the rules of the WTO in changing or constraining those Chinese practices.

And therefore, the Section 301 investigation, the imposition of tariffs, was an alternative tactic to achieve the same ends. Basically, market-opening reforms of one sort or another in China. And I do think that there are people in the administration—certainly Secretary of Treasury Mnuchin I think, by and large I think the USTR Bob Lighthizer is trying to take that approach. But as you suggest, there is a second, very strong faction in the U.S. government. I think Peter Navarro is probably the key figure there, but you could look at the role of Steve Bannon outside the government, who are pushing for a much deeper decoupling of the two economies—seeing China as a strategic threat to the United States, particularly concerned over Chinese technology gains, and wanting to use the various levels that the U.S. government has to try to retard China’s technological development.

If you look at how the president talks about this, you get the sense that that second faction is much stronger. Whenever the president tweets, he’s not talking about, you know, the Chinese are going to agree to treat our companies more fairly or, you know, the Chinese are going to open their market to U.S. exports. It’s always about, you know, all the good things that the tariffs have done for the United States—so, blocking Chinese access has been good for the U.S. He’s been quite explicit about urging companies to relocate either out of China to other places or back here to the United States. He said, we’re negotiating with other countries so that they don’t face the same situation that China does.

Most of what the president has said about the dispute, particularly over the last couple weeks when he’s been tweeting about it quite continuously, suggests a fairly concerted effort to try to force companies doing business in China to relocate and supply the U.S. market form alternative locations—either other places in Asia, or from within the United States. And I think if you add the Huawei action on top of that, that’s also very much of a decoupling kind of move. I think you would have to say at the moment that that decoupling faction has the ear of the president and seems the stronger of the two.

I don’t have a crystal ball on economic impacts. I mean, companies are very adept, certainly the larger ones, at moving around their supply chains, at building in contingencies as needed. I think large multinationals, by and large, will be able to adjust it. There’ll be costs, they’ll be costs for American consumers. Prices will go up. They’re certainly going to go up as a result of the second and the tariffs going to 25 percent. And certainly if we have an additional round tariffs, that’s going to hit a whole range of consumer items, from clothing to smartphones, so that Americans will feel it in their—in their pocketbooks. But I’m not confident in predicting that it has a massive negative macroeconomic impact. I don’t think we’re quite there yet.

KAHLER: OK.

ECONOMY: Miles, can I just make one quick point? Because Ted raised the points on decoupling. And I just kind of want to toss into the discussion the idea that in fact, you know, China itself has its own mechanisms for decoupling the two economies. So even though you have, you know, Li Keqiang and Wang Yang out there talking about, you know, that it’s not realistic to decouple these economies. I think if you look at things like the laws that are in place around internet content or data localization, or even if you look at Made in China 2025, those are also very much elements of, you know, a decoupling of the Chinese economy, so—from the—from the U.S. economy and, indeed, in some ways from the global economy. So I just want to sort of make clear that this decoupling process, while the Trump administration has been very loud about it, or elements of the Trump administration have been sort of, you know, loud about it, that there are also things taking place in China that suggest that they’re not entirely uncomfortable when it suits their own purposes to have the economy somewhat decoupled.

KAHLER: All right. Good point. Thank you both.

So I think it’s time to open the question and answer session. And so I’d like to invite the members who are online to join our conversation with your questions. I want to remind you once again that this is a meeting on the record. And please limit yourself to one question and try to keep your questions as concise as possible to allow as many members as possible to speak. So let’s open the conference call to questions.

OPERATOR: Thank you. We will now open the floor for questions.

(Gives queuing instructions.)

The first question will come from Bob Tuttle, Council on Foreign Relations. Please go ahead.

Q: Yes. From what I have read, the—we basically had a deal, and when the negotiators—when the Chinese negotiators returned to China, I guess, and presented this to President Xi and whatever, that that’s when they said no, we won’t do some of the things that they were supposed to do administratively or in the law. And that’s what has caused the president to put on the tariffs. And I wondered if you agreed or disagreed with that—at least what I’ve read. Maybe I’ve been reading the wrong things.

ECONOMY: So let me take a crack at it, then, Ted, maybe you want to also offer your thoughts. So there are a lot of different theories around about exactly what happened. You know, one theory is, in fact, exactly as you said, that Xi Jinping made this determination. Another theory that was presented by a Japanese scholar, that in fact Xi Jinping and Liu He were on board, but that a group of more conservative and nationalistic Chinese elite pushed back against the deal. And there’s another sort of element to this too, which is just that the Chinese believed that, you know, that last 10 percent that had yet to be negotiated meant that the other 90 percent that the U.S. thought had been negotiated was still open for negotiation.

And so, you know, it’s clear that there was more discussion that went on after Liu He went back. You know, how exactly it played out, I don’t think we know. But I think there are different sort of lines of sort of possible explanation for it. But it does constitute a much more significant reworking of the agreement than certainly the U.S. side had anticipated. And you know, what Liu He said as he came back was basically, you know, listen, no deal is negotiated till the end of the deal. That’s the way that negotiations work. But my sense, quite frankly, from the what that he expressed that was that he was not 100 percent comfortable with that himself.

But this is a lot of tealeaf reading, and I haven’t seen any definitive statement about exactly what transpired. But certainly the idea that it had to do with writing things into law was one that was floated, in fact, by our administration. So said that that was one of the sticking points, and that the Chinese—you know, that that could be viewed as either an infringement on their sovereignty in some way, or that it was just time consuming to have to take this back to the National People’s Congress. But, you know, I don’t think that was probably the reason.

ALDEN: I mean, the only other thing I would add is I think there is a lot of tension between the two sides over public presentation of a deal, if they can get one. I think the Trump administration wants a publicly available agreement that makes it very clear that the Chinese are agreeing to do a whole bunch of changes under direct U.S. pressure. And I think the Chinese want a more face-saving version of that, something that can be done quietly, perhaps an understanding that wouldn’t be made public, a sort of basic summary of the agreement as opposed to detailed public laying out of what measures the Chinese have agreed to. And that was historically more the way the United States dealt with China.

If you look at the negotiations during the Bush administration to try to deal with the undervalued renminbi that were led by John Snow, who was then the treasury secretary, a lot of very quiet talks that did result in some movement by the Chinese, but no great public pressure. For instance, we never named China publicly as a current manipulator, as could have been done under the ’88 Trade Act. So this—the Trump administration’s very direct, public approach I think is really, really challenging for a China that very much wants to be seen as an equal and doesn’t want to be seen as being pushed around by the United States.

ECONOMY: Ted, that’s a good point. But I would probably offer that without that kind of very explicit set of agreements or pledges on the Chinese side I think there’s very little trust on the United States side that the Chinese will be accountable for what they, you know, are supposed to deliver.

ALDEN: Yeah, which is, I think, a dilemma at the heart of a lot of this.

KAHLER: Well, let me follow up with—on that, because one of the other issues with compliance is, of course, using—continuing to use the tariffs as kind of a trigger mechanism, if you will, keeping them in place as a compliance mechanism vis-à-vis the Chinese. Is that going to be an important sticking point? That has been a sticking point, it appears, but, I mean, is that going to be a critical point going forward for both sides?

ALDEN: Hey, I mean, I think it’ll—I think it’ll be a huge sticking point. I think the president’s very reluctant to remove the tariffs. And tactically, I think the administration very much wants to have a quick hit response if the Chinese are seen as not complying with the terms of any deal. So there’s sort of two possibilities, which, one, you leave tariffs in place, and they come off slowly as the Chinese meet certain benchmarks. I think that’s the preferred approach of this administration. The other option is you have a unilateral U.S. right to reimpose tariffs, the Chinese would not retaliate in kind, in the event of Chinese failure to meet the terms of the deal. I think the Chinese would be very reluctant to agree to that. So I think either of these enforcement measures is very, very difficult for the two sides to find common ground on.

KAHLER: OK. Let’s go to questions.

OPERATOR: Thank you. The next question will come from Anna Skelton with Bank of America. Please go ahead with you question.

Q: Hi. So you’ll have to forgive me if this was addressed earlier, as I had to join a couple minutes late, but do you foresee any rise in Chinese cybercrime or cyberespionage in either the short or the long term as this negotiation process continues?

ECONOMY: Hmm. I mean, I guess, I wouldn’t say that I see a rise in cyberespionage as a result of the difficulties in this trade relationship. I think we’ve already seen the pickup of cyber economic espionage over the past year or two. There was the thought that in fact it had died down, although some people dispute that as well, in the immediate aftermath of the agreement that President Obama signed. But I think we’ve already seen an uptick. I don’t know why we would see a greater—you know, an increase yet again. I suppose it’s possible. I guess it could be one tool that the Chinese would use. But I think they have other more direct efforts that they would—that they would put in place.

KAHLER: OK.

OPERATOR: Thank you. The next question will come from Ana Swanson with The New York Times.

Q: Hi. Thanks for doing the call.

I was curious how you see—whether you see a path forward to striking a deal from here? I mean, it seems like there would have to be kind of a significant climb down on one side or the other. I mean, what would have to happen in order for there to be compromise and agreement?

ALDEN: Why don’t I—I’ll start off and then Liz can weigh in as well.

I am—I am growing more and more skeptical that there is a place where the two sides can come to a deal. I think if one happens, it’s going to be because the negative impacts of not having a deal become apparent to both sides. Either there’s a continued market reaction—and as I suggested at the outset, the market reaction has been fairly small on the U.S. side so far—or some awareness by the administration that politically this is causing them some harm. And, I mean, so far the farmers have been fairly reluctant to criticize the president. The business community, obviously very happy about the tax cuts it’s got. Again, fairly muted in its criticism of the administration. With the coming escalations, the 25 percent tariff and then potentially this final round on the remainder of Chinese imports, I think it’s quite possible you could see a much stronger business reaction.

So I think from a U.S. side, I’ll let Liz talk about the Chinese side, I think it would have to be a kind of economic and political damage that says to the administration: We’ve got to back off and find some way to just close this deal and get this issue off the table, at least until after the 2020 election. But if I look at the positions the two sides have taken at the moment, I do not see a path to a deal.

ECONOMY: So I think I would—

KAHLER: Liz.

ECONOMY: Yeah, I agree with Ted. Maybe I’m slightly more optimistic that we’re not quite as far apart as it seems. I know that this seems like a complete breakdown in talks, I mean but we did see Secretary Mnuchin say that perhaps he would be headed back. And the Chinese have left the door open. Despite all of their heightened rhetoric, they have left the door open to talks. There have been many comments to the effect that, you know, having a deal would be better, and is the desired outcome.

I think to some extent the demands on the Chinese side are still quite broad in the way that they’re worded. And so I think that leaves some room for negotiations still, right? So, you know, what does it mean in fact to say, you know, the trade deficit can’t be used as a reason to impose tariffs? You know, maybe you can have instead of the two hundred—and, you know—fifty billion that you would take it down to fifty billion that the U.S. administration would keep on, you know, as an enforcement mechanism. And there were talks about, you know, bilateral enforcement mechanisms.

So, you know, I don’t know. I do think it’s something that both sides will have to feel a little bit more pain. And President Trump probably would need to feel as though there was a significant political advantage to having a deal by the end of June, you know, when he has a potential to meet with Xi Jinping. So, you know, if something were happening within the political space in the United States, it signaled to him that, you know, he wanted a victory. And I think that also would help push the U.S. side to seek some compromise.

KAHLER: Let me follow up on that, Liz, and ask you: The other—the other possibility, which seemed to be the case during the first year of the Trump administration near the trade conflict was that we needed China for other foreign policy issues. In that case, it was North Korea. And that’s sort of dissipated now. Can you foresee any foreign policy—there are lot of other foreign policy issues certainly on the Trump administration agenda right now—Venezuela, the Middle East. Can you see any foreign policy agenda item that would lead up to link trade settlement with Chinese help on a foreign policy dispute or issue of some kind?

ECONOMY: No. You know, it’s actually fairly hilarious, because while it is true that President Trump did say that if, you know, you Chinese help us with North Korea you get a better deal on the trade front, that is not what happened. The Chinese, in fact, did help us with North Korea more than they ever have before, and then we went ahead and launched, you know, the first of the tariffs. So I don’t think that, A, the Chinese would have any reason to trust, you know, President Trump if he were to offer such an opportunity. And honestly, I don’t see the administration looking to China right now for assistance on any of the issues that you’ve raised in such a significant way that it would somehow prompt them to link—truly link trade—easing on the trade front to get Chinese support on one of those other issues.

KAHLER: OK. Next question.

OPERATOR: Thank you for the question. The next question will come from Robert Kapp with Robert A. Kapp and Associates. Please go ahead with your question.

Q: Hi, everybody. Hi, Ted. Hi, Liz.

I concur with Ted on the matter—on the matter of China needing to have some sort of long-run ownership of the measures that it would take to satisfy U.S. demands. And we’ll see whether that stands up. But I have a different question. Thomas Wright of Brookings has recently put an article in The Atlantic arguing that all the different Democratic candidates should get together and recognize that China is the one issue on which all Dems can agree, and on which they should run to win against Trump in 2020. My reaction is that it’s sort of the old China as a stage prop in American politics syndrome reasserting itself. But we’re in a different era now. What do you think?

ALDEN: Let me—oh, I’m sorry. Go ahead, Liz if you want.

ECONOMY: No, go ahead, Ted. Go ahead.

ALDEN: Yeah, I mean, I was going to sort of answer that question more broadly with respect to trade. I think—I mean the Democrats are in a fascinating position now on trade because the complete flipflop of the Republican Party from being a party in favor of freer trade, in favor of global rules on trade, to a protectionist—excuse me—protectionist economic nationalist party potentially gives the Democrats an opening. If you look at Democratic voters, they’re generally now consistently more in favor of trade than Republican voters. There are a lot of constituencies that the Democrats would like to appeal to—farmers, small manufacturers, obviously consumers and others who are being harmed by the trade war. But the Democrats carry the weight of having opposed the main thrust of U.S. trade policy now for sort of thirty-forty years—certainly going back to NAFTA and in some cases even before.

And so, you know, the question: What would you have done about NAFTA? Senator Harris was asked recently when she said: I would have voted against it. Is still this kind of litmus test for Democratic candidates. So I think they are going to have to find a creative way to embrace a somewhat more pro-trade position. And they’re going to have to couple that, I believe, with a much broader competitiveness strategy. Say, look, if we’re going to succeed as a country—and this gets to the China piece—succeed as a country in the next era of economic and geopolitical competition, we’re going to have to take of problems at home.

We’re going to have to fix problems in our education system. We’re going to have to train and retrain workers better than we’re doing. We’re going to have to finally get off our butts and pass a big infrastructure program and get into the 21st century on infrastructure. We’re going to have to invest in R&D so that we remain the world’s technological leaders. So I think there is a whole set of policies there that Democrats could package as a much more positive approach to dealing with China and the trade challenges of the 21st century. But they’re so handcuffed by this old sort of reflexive trade agreements have been bad for the United States position that I don’t know whether they’ll be able to get out of it.

ECONOMY: So I would just suggest that I think China is not a very good issue for—on which the Democrats could hang their—to hang their hat. I think looking across the spectrum—so if you move beyond just the trade issue but look at what’s going on Xinjiang with human rights, or consider issues around Chinese influence operations, you know, as they’ve been discussed in this country—cyber economic espionage, which was raised earlier—I think, you know, what China is doing in the South China Sea or what it’s doing in Hong Kong, I think the range of Chinese activities, both those that the U.S. feels are, you know, directly affecting the United States, but more broadly China’s behavior on the global stage doesn’t make it a very attractive sort of target for a big shift in U.S. policy.

I would suggest, though, that there is room—you know, I think Ted offered one, you know, great set of ideas. I also think that there’s room for the Democrats if they could, you know, manage to find their way too. And I think probably many of the moderate candidates could, to say the U.S. needs to reengage in the world, right? And that goes to, you know, the CPTPP, right, which, you know, frankly, in the Asia Reassurance Initiative Act that was sponsored by Cory Gardner and some others in the Senate, was passed, and the president signed, there are provisions in there for, you know, a U.S.-ASEAN bilateral trade pact. It talks about multilateral trade as a positive. You know, getting back into the climate—Paris climate accord. So I think there’s a role for some U.S. leadership globally as a positive and could maybe wind China into that and say that kind of partnership, you know, is important as well, working with China on these issues. But I don’t see China, per se, as a winning hand.

KAHLER: Thanks for the question, Bob.

OPERATOR: Thank you for the question. The next question will come from Rudolph Costanza (ph) with JPMorgan Chase.

Q: Hi. Thank you for taking my call.

What—how does the Chinese government see the leverage that its ownership of the U.S. Treasury as part of this broader debate and the trade issue? And how is it willing to use it?

ECONOMY: Yeah. So, you know, there are commentators in China who certainly talk about it as a source of leverage. In fact, that just came up. One scholar of U.S.-China relations (in general ?) just said, you know, the Chinese have three things that they could do. They could bar rare earth exports, they could sell Treasurys, and they could punish U.S. companies, right, the U.S. companies that are doing business in China. So it’s often touted at sort of challenging times as a source of Chinese leverage. We haven’t seen China use this. I know there was a big, like, news push I think today or yesterday about the fact that there was a more significant sell off in U.S. Treasurys by the Chinese in March than there’d been, you know, since—for two years. But in fact, if you look at February, they bought more than they sold. So I don’t look at this as, you know, all that significant at this point in time. I think there’s general recognition within China that, you know, a massive selloff of U.S. Treasurys would hurt China as well. So but it’s definitely discussed. You know, I could be proved wrong, but so far we have never seen them use that.

ALDEN: I would also just add, you know, our colleague Brad Setzer has been writing about this issue extensively. And one of the things to keep in mind is, of course, the Federal Reserve has a fair bit of ammunition if the Chinese were to start to behave in ways that had some effect in pushing up U.S. rates. So this may not be as effective—as effective a weapon as some people think, even if the Chinese were to try to use it. But Brad’s done a lot of good writing on this and goes into this in much deeper detail than I can.

KAHLER: Thank you.

OPERATOR: For the next question—the next question will come from Andrea Shalal with Reuters. Please go ahead with your question.

Q: Hi. Thanks for doing this call.

I’ve just been wondering if you have any insights into whether the timing of the announcement on Huawei in related to the sort of problems in the trade negotiations or they’re two things that are sort of running independently? What kind of—what’s your sense of how to interpret that?

ALDEN: I’m happy to start with that one. I do not, I’m afraid, have any inside information. I mean, we have all known for some time that an executive order of the sort—of this sort was in the works. And so in that sense, it was not unexpected. Whether it was used right at the moment to try to increase leverage on the Chinese, certainly possible. I don’t have any, as I say, inside insight on it.

The one thing that I think is going to be a real challenge here is that so far the trade negotiations have been separated from the issue of Huawei. And I’m looking particularly at what’s been going with the Canadians, who arrested Huawei’s Chief Financial Officer Meng Wanzhou back in December. And the Canadians have faced a huge amount of pressure from China—both arrests of Canadian citizens in China and China blocking purchases of Canadian Canola and other products. And the Canadians have been trying to put this on radar of the administration. And the administration has said: You know, that’s a whole separate issue. Our trade talks with China are one thing; Huawei is another.

I think after the announcement yesterday, and Huawei’s addition to the entities list, I do think it’s going to be more difficult to continue to separate those two issues. I mean, we’ll watch how the Chinese react. Liz has more insight on that than I do. But I think it’s going to be harder to keep the trade talks on one path and the Huawei issue on another path than it has been prior to the announcement yesterday.

ECONOMY: Yeah, I don’t have any additional information. But I would just not that if you look back several months to when Meng was first detained in Canada, that I think President Trump did in fact link her detention to the broader issue of trade, and then, you know, a lot of people in the U.S. government said, you know, you can’t do that. These two things are very separate, and that he was undermining the whole case by doing that. So I think we’ve heard about it since, but I do think in the president’s mind, you know, everything is sort of negotiable, and tradeable. And so I think that was in his head, in any case.

ALDEN: Yeah. And that could certainly come back. I think he has not reiterated that position for exactly the reason you suggest. But it’s certainly possible it could come back.

ECONOMY: Right.

KAHLER: Let me just—let me ask you, Ted, going back to your earlier commentary on—comments on the two competing viewpoints, whether intended or not, doesn’t the Huawei action lend support to those in China who think that what the United States administration is aiming for is a broader decoupling or restraining of China’s economic rise? I mean, it may not be intended to be that, but that’s the way it looks—or, could look.

ALDEN: Oh yeah. I mean, absolutely, no question. I mean, you know, the U.S. campaign against Huawei has been, you know, by any reasonable measure, extremely aggressive. I mean, you look at the different measures—so, Meng’s arrest in Vancouver on allegations of involvement in violation of Iran sanctions, the very concerted campaign to pressure allies—Canada, the U.K., Germany, Japan, Australia, and others—to no longer purchase Huawei products, the effective ban here in the U.S., which has been in place for some time, and now this latest escalation, particularly I think placing Huawei on the VIS entities list, which in theory and practice, in fact. Let me be clear, in practice means that U.S. companies are now going to need to get an export license to do business with Huawei. So Google selling Android operating equipment or, you know, chip makers selling chips to Huawei—which they do—they’re going to require export licenses. That will be at the discretion of the U.S. government.

So this is a whole series of significant escalations that potentially have the effect of crippling one of China’s most successful companies. So it’s hard for me not to see the Chinese reacting to that in some way. They’ve been pretty restrained so far. Basically, they tried to make their case publicly to other countries that they should continue to buy from Huawei. But it’s getting harder and harder, I think, to—sorry, let me rephrase that. I think that the Chinese—you know, every step by the United States makes it much harder for the Chinese not to push back in some way, because the options for Huawei grow narrower and narrower.

ECONOMY: Yeah. I would agree that until the last—until this last step about potentially placing Huawei on the entities list, that everything else was at some level justifiable, right? So it’s justifiable if, you know, Huawei tries, you know, to knowingly evade the sanctions on Iran. It’s justifiable to be concerned about Huawei’s integration into the U.S. network on security—on national security grounds. It’s justifiable to be concerned about Huawei as a, you know, sort of, you know, constant, perpetual, you know, IT sort of thief. So, you know, it’s not just one or two—like, there are, like, six well-known examples over time.

So I think there are many reasons why the United States is not off the mark in terms of going after Huawei, but I do think this last step does speak very directly to Chinese sort the U.S. is just trying to contain sort of our economic growth and our rise as a—as a technological superpower. I think it takes it a little bit over the line.

OPERATOR: Thank you. The next question will come from Christine Anne (sp) with NYU. Please go ahead.

Q: Hi. Thank you for accepting my question.

So as far as the energy industry, I think the U.S. might be a bigger victim from the trade war because China is one of the largest consumer, and they are being reluctant to import U.S. oil and gas. And my hypothesis was that in order to fill the supply gap of the U.S. oil and gas, China might be more willing to invest more heavily in oil and gas projects under their Belt and Road Initiative, who are closer to China, than the U.S. So my question is that do you think U.S.-China trade war is something that triggers China to reinforce its Belt and Road Initiative in order to decouple from the U.S. economy? If that’s the case, do you believe China would ultimately use Belt and Road Initiative to exert stronger influence to counter the U.S.?

ECONOMY: So let me just start. I’m not sure where the U.S. ranks as a source of oil and gas for China. I think Russia is number one. I think Middle East. I’m not sure that we’re in the top three, for example. I would—I would have to look. But in terms of—so, you know, I’m not sure how significant. I think there was the anticipation that China was going to—certainly in the natural gas sector—was certainly going to do more and was to buy more. And that was—that was going to be one of the big winners. The energy sector in the—when China was planning to, you know, purchase more goods to try to address, you know, President Trump’s problem with the bilateral trade deficit. So, for sure, there’s an opportunity cost, right, for the energy sector.

In terms of—in terms of whether China’s going to now turn to the use of Belt and Road and try to exert more leverage, I think Huawei already, for example, has 40 percent market share—(laughs)—you know, throughout much of the Belt and Road countries and other countries, and telecommunications. I think Belt and Road is moving forward, you know, across the full spectrum of not only economic, but political and security initiatives from China. And, you know, does this make it move any faster? I don’t know. I think it has its own internal logic and pace that is actually fairly aggressive, and maybe been a little bit tempered by all of the backlash from participating countries, as we saw in the recent Belt and Road Forum.

But I don’t think there was anything about this U.S.-China trade deal that would have slowed down Xi Jinping’s desire for China to play a greater role on the global through the Belt and Road, and to use that, in many respects, to transform the geostrategic landscape.

ALDEN: Yeah, I got nothing to add on this.

KAHLER: OK. Thank you. Next question.

OPERATOR: Our next question will come from Seng-Min Lee (ph) with Radio Free Asia. Please go ahead.

Q: Yes. Thank you for taking my question.

I wanted to ask you about the impact of U.S.-China trade war to U.S.-North Korea nuclear program negotiation. (That was at best ?) mentioned briefly before, I want to know in detail. The U.S. has been asking for China to cooperate on North Korea nuclear issue, like implementing U.N. sanction against North Korea. But can you tell me how you feel about impact of U.S.-China trade war to North Korean nuclear program negotiation?

ECONOMY: You want to say something, Ted, or do you want me to say something?

ALDEN: I do not, Liz. That is your territory. (Laughs.)

ECONOMY: OK. I mean, look, I think that the trade war plays into this insofar as, you know, an overall more positive relationship between the United States and China would probably encourage China to maintain the sanctions that are in place in a more sort of stringent manner. I think what we’ve heard over the past, you know, six to nine months is that not only China but also Russia and to some extent South Korea, they’re all much more interested in relaxing the sanctions and engaging North Korea sort of more, you know, in the economic sphere, so that the interests to some extent have already diverged, independent of the U.S.-China trade war. Certainly it won’t make it any easier for the United States to influence China on North Korea, but I think that, again, China already has divergent interests from the United States at this moment when it comes to the sort of severity and the—you know, again, the frequency with which the sanctions are being enforced.

KAHLER: Ted, you didn’t have anything for that one?

ALDEN: Nothing to add on that one, no. Thanks.

KAHLER: OK. Next question.

OPERATOR: Thank you. The next question will come from Peter Wolff with Time Warner. Please go ahead with your question.

Q: Thank you very much.

I’m wondering about a possible scenario where Xi Jinping and the Chinese leadership feels that they really can’t do business with Trump and the Trump administration and decides to do whatever they can to undermine him, both internationally with other countries and also do whatever they can to influence the 2020 election. You know, both subtly and perhaps the possibility of cyber interference. I know the Chinese have very oft-stated views about interfering with internal affairs of other countries, and that they haven’t gone far in trying to interfere with basically favoring the KMT in Taiwan. But what are your thoughts about this hopefully unlikely possibility?

ECONOMY: Sure. I mean, I guess, first, in part, it would depend on who the Democrats put up, and whether the Chinese believed that that person would be an easier person, you know, with whom to negotiate or would in some ways, you know, be, you know, better for China on a broader array of issues. I mean, there are certain things that President Trump does that actually suit Chinese purposes fairly well, right? So, you know, withdrawing from various international institutions, talking about, you know, deconstructing the U.S.-led system of alliances, these are things that China actually appreciates at some level in some instances. So it’s not just—it’s not just about the U.S.-China trade war.

Do I think the Chinese are prepared to interfere in the election in the way that the Russians did, or in the way that you’ve been hearing they did in the—as you said, in the Taiwanese elections—most recent local elections? You know, I don’t think that that would be their preferred route, to be frank. I don’t think they would like to be subjected to the kind of scrutiny and, you know, investigation that the Russian have endured. So I think they might be concerned that the backlash would not be worth it on the backend and would prefer to sort of find a way to—you know, to try to work with Trump or, you know, in a second term, or obviously with a new—a new president. So I don’t see that as the most likely sort of scenario for the Chinese, but, you know, I could be wrong.

ALDEN: Let me just add one thing to that. Liz obviously knows the thinking in China much better than I do. But one thing I’ve been struck, looking at it from the U.S. end, is how moderate each of the Chinese reactions has been to the U.S. tariff escalation. I mean, in the latest round the U.S. is going from 10 to 25 percent of $200 billion. The Chinese response was delayed. They’re not going to raise their tariffs on the existing $60 billion in imports, which is a much smaller number. And part of that reflects the trade imbalance. But the Chinese could have offset that by going to a 50 percent tariff, or a 75 percent tariff. They just matched it in kind, and then delayed implementation even longer. It doesn’t kick into June 1, and then it’s when the goods arrive, which is the way the U.S. set up the second around as well. So a delayed response.

And I think the Chinese have also been quite careful not to do things that for the most part are overtly punishing American companies, because I think they’re very worried about declining foreign investment. So they have not so far taken aggressive actions in response to the U.S. provocations. Obviously at some point this could flip. They could make a decision that it’s impossible to do business with this administration. But so far, getting back to one of Liz’s earlier points that the Chinese are very willing to negotiation, they’ve sent every signal that the door remains open to some kind of negotiated outcome to this dispute.

KAHLER: OK. Thank you. Next question.

OPERATOR: Thank you. The next question will come from Patrick Boyle with Bessemer Trust. Please go ahead with your question.

Q: Thank you.

I would argue that the financial markets want a deal. I think also would recall from my econ classes that high tariffs are generally bad for the global economy, and the U.S. is part of the global economy. It also seems really hard to get reelected if the stock market tanks, and the U.S. economy is doing well. So I’m just—I’d love your insight into what you think President Trump and his team are thinking in escalating this, because it seems it could disproportionately hurt and not help him politically.

ALDEN: Maybe, you know, I could partly throw this question back to you, because that was really my operative theory too, which is why I thought until quite recently that the two sides were headed towards a deal. I assumed that the absence of a deal would produce a huge negative market reaction. The president obviously cares very much about the stock market, sees it to some extent as a barometer of his performance, and doesn’t want to do anything that’s going to lead to, as you put it, stocks tanking in the run-up to 2020. But if you look at the market reaction for this next round—I mean, I think most observers, I’m far from alone in this—believe that the odds of a deal have gone down dramatically, which means we’re looking at a much longer period of uncertainty.

That ought to be having a significant negative impact on the market, given how attuned traders have been to the U.S.-China trade war. And yet, what we saw was, you know, a kind of big dip one day, particularly Monday, and then a recovery since. You would have to say that the negative market impact has been extremely modest. And I think that that will just reinforce the president’s belief that the tariffs and the strategy that he’s pursuing are not actually bad for the markets. They’re not actually bad for the economy. So there’s a sort of chicken and egg problem here, right? If the markets tank, I think it’ll put a lot of pressure on the president to back off. But as long as the markets think, well, they’re probably going to get a deal at some point and so investors are going to stay in the market, that’s just going to reinforce the course that the president’s currently on. So I don’t know where all that ends up, but so far the markets have not sent a signal that you’re suggesting they should be sending given the escalation in the trade tensions.

KAHLER: Well, I think we’ve reached the end of our question and answer session, unfortunately. It’s been a great conversation. And I want to thank Ted Alden and Liz Economy for taking these questions and providing such an illuminating conversation about a very contentious and controversial issue. Thanks to all the members who have called in. We’re sorry if we couldn’t get to your question. And thanks, again, to Ted and Liz for joining us in this conversation. Good afternoon.

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