China and the U.S. last week signaled substantial progress in their trade negotiations, as President Xi Jinping welcomed a “new consensus.” One question remains, however: Why has the U.S. opted to deal bilaterally with China rather than lead a coalition of Western nations that share the same concerns about some of the Asian giant’s trade practices? The answer to this question will be one of the leading issues in assessing whether a China-U.S. agreement is a decisive resolution to a conflict that has hung over the global economy or, instead, just a short-term cease-fire.
The list of U.S. grievances against Chinese trade practices reportedly includes a persistently large imbalance, forced technology transfers, wide-scale subsidization of tradeable activities and inadequate protection of intellectual property rights. The Trump administration is focused on forcing China to make concessions in all of these areas, confident that a trade conflict would be a lot more harmful to China than to the U.S. and willing to absorb the short-term pain associated with this strategy.
Seen through game theory, the U.S. is best placed to win a game (trade and conflict resolution) that has shifted from being played cooperatively to uncooperatively. Although succumbing to U.S. pressure wouldn’t be China’s first best outcome, it would be better than the likely alternatives, particularly a prolonged trade war.
Most, if not all, of the U.S. trade grievances against China are shared by America’s allies. Furthermore, Europe accounts for a larger share of Chinese exports than the U.S. Accordingly, a common European-U.S. front seems both feasible and desirable, and would offer a stronger bargaining position and greater negotiation leverage.
The attractiveness for Europe of a common approach goes beyond the high probability of securing concessions from China. The European Union, which already faces several challenges to its regional unity, now has to deal with what some see as a divide- and-conquer approach by China. This was evident during Xi’s recent visit to Rome, where he secured agreement on Italy’s participation in the Belt and Road Initiative in exchange for the promise of investments and loans, despite widespread concerns in the West about how the initiative has been implemented elsewhere.
Yet, rather than lead a common front powered by shared grievances and joint interests, the U.S. has pursued the issue on its own until now. And rather than prepare for its own negotiations with China, Europe worries that once the U.S. reaches an agreement there the Trump administration will push for concessions from the EU, including on autos.
There may be a simple explanation for the U.S. strategy, especially when it is viewed through game theory.
First, the strategy makes sense in terms of the domestic political context. Unencumbered by the need to secure a consensus within a coalition, the U.S. has greater control over the content and timing of an outcome that was promised during Donald Trump’s presidential campaign, plays well to his base and takes an issue away from the Democratic Party ahead of the 2020 election.
Second, the Trump administration’s strategy makes sense in terms of the “salami approach” to negotiations, and the “repeated game” associated with that. The aim would be to secure from China an agreement that includes a “most favored nation” clause – meaning that, should the Asian powerhouse agree to more favorable terms in a future negotiation with someone else, these terms would also apply to the U.S. Europe would then be encouraged to pursue its own deal with China.
Third, it makes sense for the U.S. to retain optionality for a future round of negotiations given the concern that implementation of a bilateral trade agreement with China may be challenging. After all, it won’t be easy for China to reduce its bilateral surplus to the extent required by the U.S. Nor will it be easy for China to retreat from the traditional approach to state-owned enterprises given that the authorities are keen to use this form of stimulus to help overcome the external economic headwinds and avoid the middle-income trap in the country’s development. Also, verification of the understandings on intellectual property rights is far from straightforward.
All of this also suggests that a China-U.S. agreement is unlikely to mark a decisive end to this period of trade tension for the global economy. Instead, look for a temporary cease-fire for an agreement that is likely to face implementation challenges and that, once Europe and the U.S. resolve their own trade issues, will likely be followed by a broader coalition seeking further assurances and concessions from China.