Elephants in the Room

A Win-Win U.S.-China Trade Deal Is Possible

Selling more goods is not enough. Trump’s trade agreement with Beijing must include real structural reforms.

U.S. President Donald Trump, right, and Chinese Vice Premier Liu He talk to reporters at the White House on April 4. (Chip Somodevilla/Getty Images)
U.S. President Donald Trump, right, and Chinese Vice Premier Liu He talk to reporters at the White House on April 4. (Chip Somodevilla/Getty Images)

U.S.-China relations are entering a new era.

On the U.S. side, the optimistic belief that engaging and including China in the international system would produce a responsible stakeholder and potential partner has been largely discredited. On the Chinese side, increased confidence in the country’s economic strength and political system has made Beijing more assertive in global affairs and more skeptical of U.S. competence and leadership. Many Chinese experts see the United States as seeking to contain China, constrain its economic growth, limit its global influence, and undermine its political system. Many U.S. experts see China as an economic predator, a military threat, a geopolitical rival, and an ideological competitor.

This new era will see much more direct competition between the two countries. But if competition becomes the sum total of the relationship, the result will be a lose-lose proposition for both Washington and Beijing. If heightened competition leads to sustained confrontation, it will destroy the current global economic system that has fostered so much prosperity and progress. It will increase the risk of an outright armed conflict—which would have potentially staggering consequences. And it will prevent cooperation between the two countries in meeting global challenges such as environmental degradation, terrorist extremism, pandemic diseases, water and resource scarcity, and disruptive technological change. These are challenges that neither country can solve alone but that both countries must see solved if either is to realize its goals.

The problem is that China—with its increasing diplomatic, economic, and military might—is a strategic competitor like no other the United States has faced since it emerged as a world power after the end of World War II. The Soviet Union represented a formidable military challenge but without a strong, competitive economic foundation or an effective, adaptive political system. China, by contrast, potentially has all three.

All that being said, however, strategic competitors need not become strategic adversaries. To avoid this outcome, the two countries must work together to develop a framework that will bound their competition, prevent it from driving them into confrontation or conflict, and allow some scope for cooperation. China and the United States must be strategic competitors and strategic cooperators at the same time. This will be very difficult, with few historical precedents. And to reach this outcome, the United States must be prepared to compete successfully in those areas critical to its national security and economic future—and China must understand that the United States will do so.

There are two areas in which competition most threatens this model of U.S.-China relations. The first is critical 21st-century technologies—such as artificial intelligence, quantum computing, cyberweapons, and autonomous machines—which could lie at the center of a technological cold war between the two countries. The second is the Belt and Road Initiative, China’s international development strategy, which could establish Chinese domination of critical global infrastructure. Yet even in these areas, strategic competition need not extinguish strategic cooperation.

For example, the world desperately needs more infrastructure (such as roads, railways, highways, airports, and power plants). For projects that are not critical to U.S. national security or economic interests, the United States and U.S. companies should cooperate with China so long as it follows international best practices of transparency, intellectual property protection, resilience to corruption, sustainability, and fiscal, environmental, and social responsibility. By contrast, from a national security perspective, it is just too risky to let China dominate the global digital infrastructure. It would be too tempting for China to use that platform for espionage, data theft, and disruption of global communications in the event of an international crisis or conflict. And China will come to dominate digital infrastructure if the United States does not get in the game and develop its own capabilities to compete successfully—mobilizing private industry and private capital, incentivizing innovation and technology development, and re-energizing cooperation among industry, academia, and government.

A good example is 5G wireless networks: China wants to wall off its domestic 5G market as a privileged sanctuary for its own national champions (think ZTE and especially Huawei). Using the scale of this domestic market and, in some cases, government subsidies, these national champions can then underprice their non-Chinese competitors and dominate if not monopolize the global market. The United States is pressuring countries around the globe to avoid Huawei products and technology, with only mixed success. The problem is that there are currently no real alternatives to Huawei as an end-to-end 5G provider. The United States should share technology and otherwise seek to develop such alternatives—working with U.S. companies but also companies of major U.S. allies (companies like Samsung, Nokia, and Ericsson)—so that countries seeking 5G have choices. The United States should also seek to develop 5G network capability that would remain secure even if deployed over equipment that is potentially compromised (because it contains Huawei hardware or otherwise). This would both hedge against the risk of failure of the U.S. campaign against the adoption of Huawei 5G technology and help mitigate the competition between the United States and China—and Huawei and other companies—in the 5G area. The United States should also insist that China open up its own digital infrastructure market to non-Chinese companies, creating a global market and level playing field open to all comers. This result would not only produce economic benefits for both economies but would further bound the competition between the United States and China, reducing the risk of confrontation and conflict.

The resolution of the current trade crisis should similarly seek to bound and mitigate competitive risks. And, as the Chinese would say, there is a win-win solution available if the parties can seize it. As many Chinese experts will acknowledge, China’s economy needs further market-oriented reforms and further opening up to both the Chinese private sector and foreign companies. Such reform and opening up is the only way to produce the increased competition, innovation, and efficiency that the Chinese economy needs if it is to produce the economic growth that the Chinese Communist regime has promised its people. A new round of reform and opening up would also address the complaints of the Trump administration and the U.S. business community about the lack of access to the Chinese market, China’s failure to protect intellectual property, and industrial policies that favor Chinese state-owned enterprises at the expense of virtually everyone else.

In order to achieve this win-win outcome, the trade agreement currently under negotiation between the two countries must involve more than just dramatically increased purchases by China of U.S. goods (such as natural gas, soybeans, and other agricultural products). It must also involve China’s commitment to make structural reforms that will open its economy to greater foreign participation, reduce government subsidies and regulatory protections to Chinese state-owned entities and other national champions, create a level playing field for both Chinese and non-Chinese competitors, and provide for truly reciprocal trade and investment. There is strong support for this agenda of structural reform across the U.S. political spectrum, among Republicans and Democrats, and no trade agreement that fails to provide such relief will be sustainable politically.

There appears to be a struggle within the administration for the mind of U.S. President Donald Trump on this issue—with many (including U.S. Trade Representative Robert Lighthizer) arguing strongly that the trade agreement must not only involve structural reform but also contain a real enforcement mechanism to ensure that China complies with its commitments. Indeed, some argue that current U.S. tariffs on Chinese goods should not be loosened until there is not only a trade agreement but actual evidence of Chinese compliance with it.

Only with real structural reforms will the Chinese economy be able to continue to contribute to global economic growth and will the two nations be able to resolve the trade issues that now hold hostage the future of U.S.-China relations. The threat of increased tariffs and a weakening Chinese economy has presented the Trump administration with a once-in-a-lifetime opportunity to make progress on these structural issues. It must not let that opportunity slip away.

But much will depend on the Chinese side. Economic reform is in tension with the political agenda of Chinese President Xi Jinping, who has championed increased Communist Party control over almost all aspects of Chinese life. The question is whether Xi can be convinced to embrace economic reform and opening up that is broad enough, deep enough, and soon enough both to meet the needs of the Chinese economy for future growth and to satisfy the demands of Trump and the U.S. business community. To win this argument, Xi must be persuaded that political repression as an instrument for greater political control will ultimately be self-defeating because it threatens future economic growth. For it is sustained economic growth on which the regime’s political legitimacy, public support, and ultimate political future depend. In this context, increased political repression risks threatening the very political control that Xi seeks to achieve. He needs to change course.

Stephen J. Hadley is a principal of RiceHadleyGates. He served as the national security advisor to President George W. Bush from 2005 to 2009. From 2001 to 2005, he served as deputy national security advisor.

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