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Penelope B. Prime

Management

U.S.-China Trade Deal: Three Fundamental Issues Remain Unresolved

The game is far from over

Published: Monday, January 6, 2020 - 12:02

The United States and China have reportedly reached a so-called phase one deal in their ongoing trade war.

While few details have been disclosed, the agreement principally seems to involve the United States calling off a new round of tariffs that were slated to take effect on Dec. 15, 2019, and removing others already in place in exchange for more Chinese purchases of U.S. farm products.

Good news, right? The end of the trade war is nigh? Don’t get your hopes up.

Although business leaders in both countries will be temporarily relieved, the underlying tensions between them will not end easily.

As an economist who closely studies the U.S. relationship with China, I believe there are fundamental issues that won’t be resolved anytime soon.

Doing it in phases

Tariffs and other trade issues have received most of the attention during the trade war, but the more fundamental—and difficult—challenges are with lax intellectual property protection and China’s industrial policy.

The United States is unhappy with China’s use of these tools to develop its economy, and to help its companies compete—unfairly, from the U.S. perspective. And many of the Trump administration’s demands challenge China’s normal business and policy practices.

China’s leaders can’t be seen by Chinese citizens as giving into the United States, while Trump wants to show that he is tough on China as part of his reelection strategy. This makes negotiations very sensitive on both sides.

That’s why American and Chinese negotiators, who have been engaged in talks for almost two years, decided to try to get to an agreement in phases.

Phase one has focused on the trade balance and tariffs. Phase two is expected to then deal more deeply with intellectual property enforcement and economic reform in China.

Given that the negotiations have gone on so long with fairly little to show for it, it’s fair to ask, why are these issues so difficult to resolve? I believe there are basically three issues that have made finding any common ground difficult—and phase one won’t change that.

Government subsidies

First, China’s successful growth has combined market competition with government-led industrial policy. For example, when China’s leaders decided the economy needed more innovation, it created incentives and targets for companies and research institutes to create patents. The number of patents filed has soared as a result.

A wide range of government subsidies is used to direct and assist private as well as state investment in similar ways.

The United States does this as well but not on the same scale, and therefore views it as unfair.

From China’s perspective, however, it is not reasonable for the United States to require China to change its development model in exchange for removing tariffs.

Protecting intellectual property

Getting China to do more to protect the intellectual property of new technologies is another especially thorny issue.

Both countries are facing economic challenges that can be aided by improved technology. But since in many areas Chinese capabilities have caught up with those of the United States, or are being rapidly developed, there is much more pressure from the United States for China to accept global norms on intellectual property rights.

Even while China’s own IP protections have improved at home, there is ample evidence that Chinese companies have copied foreign technology without permission or payment, despite China’s acceptance of IP protection as part of World Trade Organization membership.

Foreign companies also report being compelled to share advanced technology in order to do business in China. While, technically, the companies can decide to pull out of China’s market, the United States argues that this hurts the competitiveness of U.S. businesses. It either means they must lose their technological advantage or not have access to the business opportunities that China’s large market offers.

There is no reciprocal requirement of Chinese companies doing business in the United States.

Military concerns

Finally, technology capabilities are related to growing military concerns.

Many of the advanced technologies that China is racing to obtain have military as well as civilian uses. U.S. policy under the current administration has indicated a wariness about China’s military intentions and is considering options.

This wariness has been bolstered by China’s military buildup, especially naval capabilities in Asia. Some advisers to the Trump administration argue that China’s ultimate long-term goal is to replace the United States as the dominant global power.

China’s rise

Differences in the United States’ and China’s economic systems were less of a problem so long as Chinese companies lagged far behind their U.S. counterparts in terms of technology and competitiveness.

As China has grown more technologically advanced, its relationship with the United States has come under increasing strain. This will only get worse as China’s economy develops, and its companies compete more with the United States and others. The different approaches will continue to create conflict.

Chinese leaders are weighing how much good relations with the United States will matter to their country’s future. Their answer will help determine how much they are willing to meet U.S. demands.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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About The Author

Penelope B. Prime’s picture

Penelope B. Prime

Penelope Prime is a clinical professor of international business and the director of the China Research Center at Georgia State University.