What Biden Should Do About China

During the campaign, Joe Biden said he’d be as tough on China as Donald Trump, but that he’d work with America’s allies to do so. This was a smart move for Candidate Biden. But it shouldn’t be the China strategy of President Biden.

Instead, Biden should return to the pre-Trump consensus position that more engagement with China, above all economically, is in America’s interests. He can’t use the pre-Trump justification for engagement—that it will ultimately make China more democratic—because under Xi Jinping that notion seems at best naive.

Rather, Biden should make the case for engagement with China on two grounds, that it:

1)     Is good for America economically

2)     Decreases the chances of military conflict with China

Economically, it is time to change the script from the Trumpian notion, shared by the left of the Democratic Party, that the volume of US exports to China is the sole measure of the economic benefits of engagement.

From farm products to Boeing airliners, exports are no doubt good for America. So too, however, is having American companies producing goods and services in China to sell to the burgeoning Chinese middle class, as firms as different as Apple and Starbucks, General Motors and Tesla, have shown.

Americans also benefit from the efficiency of Chinese production and assembly that give consumers greater choice and lower prices on products ranging from iPhones and toys to solar panels and laptops. One recent study by PwC estimates the total costs of production are 27% less in China than America—even with the much higher costs Trump’s tariffs have imposed on imports from China.

Even with tariffs on Chinese goods in place, total cost of production is still much lower than in the US.

With respect to geopolitics, there is a simple but powerful idea that goes back to the 18th century German philosopher Immanuel Kant – countries that rely on each other economically are less likely to go to war with each other.

The ballast that economic interconnections provide against the escalation of conflict has been evident many times in the past 20 years where Sino-American tensions are concerned, as frictions have increased with China’s rise to challenge US primacy. Jettisoning that ballast risks destabilizing China-US relations, making a second cold war between the world’s two most powerful countries close to inevitable.

Making the case for more engagement with China does not mean the US should not forcefully prosecute its policy differences with China. Far from it.

The Biden administration should work to change Chinese policy where it conflicts with clear American values and interests—from human rights in Xinjiang and Hong Kong to opening up the Chinese economy and protecting intellectual property, from cybersecurity and advanced technologies to sovereignty in Taiwan and the South China Sea.

At the same time, it will be important for Biden to signal that he won’t be a Trumpian knee-jerk “no” where China is concerned. The so-called Phase One trade deal Trump cut with China early in 2020 will offer an early and important opportunity.

The core of the deal was the Chinese government’s commitment to purchase an additional $200 billion of American products by the end of 2021. According to the Peterson Institute for International Economics, China is currently tracking at only about half the pace of purchases required to meet its Phase One commitment. Given the enduring drag of the coronavirus pandemic on global economic activity, it seems far-fetched to believe China will save the deal with a dramatic ramp up in purchases over the next year.

China seems unlikely to make up the gap in purchases required to meet its obligations under Phase One of its trade deal with the United States.

What should the U.S. do if and when China fails to deliver on Phase One? Trump would probably have responded with more tariffs, returning to the trade war he began in 2018.

But Biden could, and should, hold out an olive branch, giving China credit for the increased purchases of American exports it will have made while conceding that the pandemic has made the always very ambitious Phase One targets undeliverable.

Biden would have an economic justification for not over-reacting to an incomplete Phase One—and not only the new American exports China has bought. The underlying motivation for Trump’s policy is the trade deficit America runs with China. That deficit mushroomed to over $400 billion in 2018. But it has subsequently come down by more than $100 billion, mostly because Americans are buying far fewer Chinese products. On this politically key indicator, the U.S.-China relationship is becoming more balanced.

Making this case for re-engaging China economically, beginning with a more benign approach to the Phase One trade deal, will require real skill and conviction from the new administration against the anti-China winds blowing in Washington and across the country. But few things are more important to America, and to the world.

Sources:

https://www.pwc.com/us/en/library/fit-for-growth/assets/ffg-industrial-supply-chain-footprint.pdf

https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods ?