Prospects for US-China Relations in 2019

Kevin Rudd

By  Kevin Rudd

NEW YORK – Throughout 2018, much of Asia has been shaken by the new and increasingly unpredictable dynamics in Sino-American relations. One year ago, US President Donald Trump returned from Beijing after his “state-plus” visit, which China hoped had finally laid his anti-Chinese campaign rhetoric to rest. Twelve months later, China and the United States are caught in an unresolved trade war, and Trump’s administration has replaced US “strategic engagement” with China with “strategic competition.”

One year ago, moreover, the US, European, and Chinese economies and markets were roaring. Now, there is deep instability in financial markets, with growth slowing in China and Europe, and higher interest rates beginning to bite in America. Uncertainty over the future of the North Korean nuclear negotiations is also darkening the picture.

So what are the prospects for US-China relations in 2019? It’s probable that by March there will be an agreement on reducing the bilateral trade deficit and the import decisions that China will make to see it through. An agreement on tariff reductions by then is also possible, although its complexity may lengthen the timeline. A tariff-by-tariff approach could take a year. But if Chinese economic reformers take a more dramatic approach, by committing to zero tariffs over time and challenging the Americans to reciprocate, it could be concluded more rapidly. But this would run counter to decades of Chinese trade bureaucrats’ training to give away little, let alone be seen as giving away everything at once.

The reform of so-called forced technology transfer should be relatively straightforward. Nonetheless, reform is different from how contractual arrangements may be interpreted in practice, even in the absence of any specific technology transfer provisions.

Intellectual property protection, however, is deeply problematic. Previous agreements reached under President Barack Obama’s administration could be reconstituted. But the jurisdictional enforcement of breaches is still hopeless. One possible mechanism is to subject relevant contracts between Chinese and foreign firms to international commercial arbitration bodies located in Singapore or Switzerland, designed to deal specifically with the enforcement of IP protection.

If China objected, it might be possible to develop China’s own domestically based international commercial arbitration system. But the country would need to appoint qualified foreigners to its panel of arbitrators to build international credibility. No one has any confidence in China’s commercial courts. For its own domestic reform needs, China needs to move toward fully independent commercial and civil divisions of its court system, even if the criminal division remains subject to political control.

American concerns about Chinese state subsidies under the country’s Made in China 2025 strategy will be almost impossible to resolve. The reality is that all countries use degrees of government support for their indigenous technology industries, although China uses the most. Even if we mandated a maximum level of state support for a given firm, compliance would be difficult to measure. I am not confident of a negotiated outcome in this area. America may simply need to outcompete China by increasing public investment in research and development across the information technology and biotechnology sectors.

We should also not rule out the possibility of China pitching tariff reforms to the wider international community as well. For example, China could make a dramatic commitment to zero tariffs over time not just to the US, but to all World Trade Organization member states. This would represent an almost irresistible opportunity for China to champion global free trade and arrest the trend toward protectionism.

Such a turn by China could include approaching the Trans-Pacific Partnership’s member states for accession, in an ironic effort to outflank the US (which Trump withdrew from the TPP immediately upon taking office) in the Asia-Pacific region. When it sees a political and market opening, China can be remarkably fleet of foot. Negotiations would be difficult, but Japan’s reservations about China’s TPP accession have softened since Prime Minister Shinzo Abe’s recent visit to Beijing.

On the wider foreign policy and security front, China in 2019 is likely to “de-conflict” itself in its relations with other countries, given the core strategic challenges posed by the US. There is already some normalization in relations with Japan. Recent Japanese Coastguard data indicate a drastic reduction in Chinese incursions into the Senkaku/Diaoyu area in the East China Sea.

 

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