September 13, 2021

Asia

US/CHINA: Biden’s China trade strategy takes shape

BY Gabriel Wildau

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( 5 mins)
  • A phone call between US President Joe Biden and Chinese President Xi Jinping did not yield new policy outcomes, but the tone was friendlier and less accusatory than recent bilateral meetings.
  • Washington initiated the phone call, which appears to coincide with a broader Biden administration China strategy taking shape following months of internal reviews on trade, technology, and security.
  • This strategy may involve removing some Trump-era tariffs, while imposing some new tariffs justified by allegations of illegal Chinese trade subsidies.

US President Joe Biden and Chinese President Xi held a phone call on 9 September, their second call since Biden took office in January. While the call did not appear to yield any concrete new policy outcomes, the tone of both sides’ readouts was friendlier and less accusatory than bilateral meetings between senior officials in Anchorage and Tianjin.

The two countries agreed that they should not let “competition veer into conflict.” This phrase appeared in official readouts from both Washington and Beijing, though the US version stated that avoiding this scenario is “the responsibility of both nations,” while the Chinese readout said only that “the two countries have no interest” in such a conflict. Beijing’s readout was also not totally free from recrimination, stating that the decline in bilateral relations is “due to US policy on China.” But unlike readouts from the Anchorage and Tianjin meetings, neither side name-checked specific issues such as South China Sea, Xinjiang, Hong Kong, tariffs, or export controls.

The Chinese statement implies that Washington initiated the call, stating that Xi “took a phone call” from Biden. US officials confirmed on background that Biden initiated the call after administration officials concluded that lower- level engagements were pointless because Chinese officials were unwilling to diverge from rigid talking points. Despite the lack of policy deliverables, the Biden-Xi call appears to reflect a modest step towards putting a floor under the relationship that has been in freefall for two years.

Biden’s emerging China strategy

Biden’s decision to initiate the call appears especially significant in the context of media reports indicating that a broader administration strategy towards China is finally taking shape, following months of internal administration policy reviews on various China-related issues. The administration is reportedly considering three new measures:

  • The US Trade Representative (USTR) may launch a new “section 301” trade investigation into China. This is the same statutory authority that the Trump administration used as the legal basis for its trade war tariffs against China. Section 301 of the Trade Act of 1974 empowers the executive branch to impose trade sanctions on countries that violate trade agreements or engage in other “unjustifiable” or “unreasonable” trade practices. The new investigation would focus on Chinese subsidies that allegedly distort trade.
  • USTR may also re-open the tariff exclusion process that the agency operated during the Trump administration but that has now expired.
  • Biden may issue an executive order that would change the official name of Taiwan’s de facto embassy in Washington from the “Taipei Economic and Cultural Representative Office” to “Taiwan Representative Office.” Such a change would be certain to offend Beijing, since the name change suggests an upgrade of Taiwan’s diplomatic status.

Tariff rollback?

Though significant uncertainty remains, the result of these moves could be a net reduction of overall tariff levels. By pairing any rollback of Trump-era tariffs with fresh tariffs arising from a new 301 investigation and a diplomatic upgrade for Taiwan, the Biden administration could protect itself from the inevitable “soft on China” accusations.

Though the overall balance of political pressure in Washington still favors keeping tariffs in place, this balance appears to be shifting. Calls for tariff relief are rising, led by farm-state senators and business advocacy groups representing retailers, chipmakers, and farmers. Provisions in the US Innovation and Competition Act (USICA), which passed the Senate in June, would immediately remove tariffs on medical gear and some other products, while also forcing the administration to re-open the exclusion process. Elevated inflation in the US adds an incentive to ease tariffs, as do concerns that Trump-era tariffs could raise costs of materials necessary to carry out Biden’s pending infrastructure investment plan.

Focus on subsidies

A new 301 investigation would allow the administration to mark a clear break from the previous administration’s China trade policies, including the Phase 1 trade agreement, which critics faulted for failing to addressing subsidies. With Phase 1 expiring at the end of 2021, a new investigation would create the context for negotiations over a new trade agreement – in effect, Phase 2, though the Biden administration would downplay continuity with the Trump administration. By initiating fresh trade negotiations in the context of new accusations against China and corresponding new tariffs, however, Biden could avoid the impression that he is returning to the negotiation table from a position of weakness.

The Biden administration would also likely pair any new 301 investigation with an effort to recruit allies like the EU and Japan to pressure Beijing on the subsidy issue, possibly through a joint complaint to the World Trade Organization (WTO). But US allies were reluctant to join such a coalition during the Trump administration, and it is uncertain whether Biden would have more success persuading them. In addition, USICA authorizes hundreds of billions of dollars of state investment into the US semiconductor, biotech, robotics, artificial intelligence, and biotech industries. Biden has also strengthened implementation of existing “Buy American” provisions in US law on government procurement. These US actions will spark criticism that Washington is adopting the same industrial policies for which it seeks to punish Beijing. Beijing is highly unlikely to offer any concessions on halting subsidies, but Chinese negotiators might offer enhanced disclosure and transparency on Chinese subsidies, as required by WTO rules.

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