Sec. Gutierrez on U.S.-China economic relations
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President Trump’s latest swipe at China suggests that more than a year of negotiations aimed at a sweeping trade deal with Beijing may instead produce agreement only on the terms of an economic divorce.
The relationship between the two nations hasn’t deteriorated to quite that point — yet. But on Thursday, tensions ratcheted up again as China vowed to take “all necessary measures” in response to the administration’s latest action, which placed the Chinese telecommunication giant Huawei Technologies on a U.S. export blacklist.
The move against one of China’s most prominent companies, a politically connected symbol of the Chinese government’s aspirations to technology leadership, upended prospects for an early resumption of negotiations and appeared to invite a harsh Chinese response.
It also led some analysts to warn that after four decades of ever tighter economic ties, the Trump administration might seek to decouple the world’s two largest economies — a step that could shake the global economy.
“The United States could not have taken a more provocative action against China’s economy,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “This action is potentially devastating not only to Huawei the company but to the networks around the world that run on Huawei equipment. This action certainly now puts the entire economic relationship up on the table.”
Trump was personally involved in the deliberations over punishing the Chinese company. He arrived late to a Roosevelt Room meeting Wednesday about his immigration plan, saying he had been working on China trade issues. The president acknowledged that China would be unhappy with his Huawei decision, saying it could complicate trade negotiations.
But he described the decision as unavoidable, repeatedly remarking that China is taking over the world because of its technical prowess.
“Unless we stand up now, there’s not going to be a chance to do it in the future,” the president said, according to one attendee, who spoke on the condition of anonymity to discuss a confidential conversation.
With Trump scheduled to meet Chinese President Xi Jinping in six weeks at the Group of 20 summit in Osaka, Japan, the timing of the strike against Huawei puzzled many observers. “I was surprised by the timing,” said Dennis Wilder, a former China analyst at the Central Intelligence Agency. “Is this just Trump giving himself another card to play? Or has he come over to the side of those in the administration who favor decoupling?”
Derek Scissors, a China expert and occasional administration adviser who has called for the United States to cut ties with China, said the president did not support a full rupture and was simply “arming himself for Osaka.”
The trade talks themselves are on life support. After Treasury Secretary Steven Mnuchin told lawmakers this week that U.S. officials planned to return to Beijing soon for more bargaining, a Chinese Foreign Ministry spokesman said Thursday he didn’t know what the treasury chief meant.
The United States and China are starting to resemble “a very, very unhappy divorced couple that has to share the house for financial reasons and engages in constant warfare over who gets to sit on the couch and control the television remote,” said Henry Farrell, a professor of political science and international affairs at George Washington University.
Still, any attempt to disentangle the two giant trading partners would be daunting.
U.S.-China merchandise trade has nearly tripled since 2004 to a total of $660 billion last year. Cargo moving between the two countries represents roughly one of every six U.S. dollars.
The interdependence also is financial: China holds more than $1.1 trillion in U.S. Treasurys, making it the largest single foreign holder of the government securities.
As post-Mao China embarked on economic reforms starting in the late 1970s, U.S. presidents of both parties celebrated the potential gains for American companies and anticipated that Chinese political liberalization would follow.
But under Xi, China has taken an authoritarian turn, while Trump has emphasized the need to resolve long-standing U.S. complaints about Chinese trade-secret theft and discrimination against foreign companies. Washington also now sees China much more as a strategic adversary than a potential partner, further encouraging advocates of decoupling.
The Commerce Department action against Huawei capped years of U.S. government unease about the security implications of doing business with the company, the largest telecommunications equipment maker in the world.
Both the Obama and Trump administrations worried that Huawei could engineer technological back doors in its equipment that would permit Chinese officials to spy on Americans or, in times of conflict, disrupt or paralyze critical U.S. networks.
“Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interest,” the Commerce Department said in announcing that it was adding the company and its affiliates to the “entity list.”
As a result, any company that wants to sell American technology to Huawei must first obtain a government license — a requirement that threatens to sever the Chinese company’s U.S. supply lines.
On Wall Street, investors broadly took the latest trade-war drama in stride, though companies that supply Huawei took a beating. The Dow Jones industrial average rose almost 215 points, or 0.8 percent, to close at 25,862.68.
“The US-China economic relationship is too important — and has the potential to generate too much wealth — to be sacrificed for short-term protectionism,” Jim Glassman, head economist with JPMorgan Chase Commercial Banking, wrote Thursday in a research note. “Neither side would benefit from disrupting the flow of trade or reversing the integration of the global economy.”
That may or may not be the Trump administration’s view. Over the past year, the administration has taken a number of steps to slow or reverse economic integration between the United States and China.
The screening process for Chinese companies’ proposed U.S. investments has gotten tougher. New regulations to limit the export to China of emerging technologies such as artificial intelligence, quantum computing and robotics are being drafted. And Washington is getting stingy with visas for Chinese academics, students and business people.
Trump’s serial tariff rounds also have U.S. importers paying the highest average duties in more than a quarter century, according to Scotiabank, a Canadian bank.
Administration officials have adopted an increasingly harsh tone toward China since a landmark October speech at the Hudson Institute by Vice President Pence, warning companies of the dangers of doing business with China, including forced technology transfer, rampant theft of intellectual property and cyberespionage.
“China seems determined to steal its way up the economic ladder at our expense. . . . The reality is that some of these threats are existential threats to them as a business,” FBI Director Christopher A. Wray said in April.
Even if the trade talks produce a meaningful accord, both countries are likely to take divergent paths in areas including the development of advanced technology.
Trump’s advisers from the outset have been split over the goal and extent of the trade rebalancing with China. Mnuchin is among those seeking to preserve lucrative trade and investment ties. Others such as Peter Navarro, director of the White House Office of Trade and Manufacturing Policy, want to return lost factories to American soil.
“It just seems like a total misunderstanding of reality,” said Carlos Gutierrez, chairman of Albright Stonebridge Group and commerce secretary in the George W. Bush administration. “So much of what happens here starts in China. . . . It is unrealistic to assume that we can take all those supply chains that we built over there and somehow separate ourselves from China.”
U.S. efforts to limit China’s global economic role already have stumbled. Despite high-profile warnings about Huawei, the United Kingdom and Germany refused to exclude the company from supplying their 5G networks.
Likewise, Italy, another U.S. ally, brushed aside Washington’s objections and joined Xi’s signature global infrastructure program, the Belt and Road Initiative.
“China is not decoupling itself from the world. If anything, China is tying itself to the world even more,” said Gutierrez. “At a time when there are people whispering in the president’s ear that we can decouple ourselves, it seems like strategic suicide.”