US and China: Things will get worse before they get worse

As a middle-aged China expert, I never thought I’d say this: Thank heavens for Bruno Mars! His concert in Shanghai last weekend was the only thing that got me through a 10-day trip of consistently bad news on China. The U.S.-China relationship has fallen into a deep funk that is anything but uptown. 

For the past year the Trump administration has pursued a clear strategy of applying increasingly intense unilateral pressure on China to force it to abandon its mercantilist trade practices.

{mosads}It has raised tariffs twice, expanded limits on foreign investment and export controls with Congress’ help and encouraged American companies to move from China. Signs of potential breakthroughs have temporarily sent markets up, but none has ever panned out.

It seemed a corner was turned at the Group of 20 summit in Argentina, when President Trump and Chinese President Xi Jinping agreed to a 90-day truce.

Soon after, China lowered tariffs on American cars and resumed purchases of soybeans. Rumors then emerged about China potentially shelving its “Made in China 2025” high-tech plan, and the two sides resumed negotiations.

But even these signals look ready to go up in smoke. The arrest of a top Huawei executive, China’s retaliatory detentions of three Canadians and the administration’s volley of actions on cyber have brought relations to a boiling point.

Things looked no better from my vantage point on the ground in China.

Events meant to celebrate the 40th anniversary of the establishment of U.S.-China diplomatic relations turned into nostalgic elegies of a bygone era when the two sides cooperated in countering the Soviet Union and expanded commercial ties that helped both economies prosper.

Meetings descended into finger pointing and ended with a sense of inevitability. As one person concluded, “Things are going to get worse before they get worse.” 

My discussions on trade fared no better. Given how much sectors and regions predominated by private companies and vigorous competition have outperformed those dominated by state-owned behemoths, thoroughgoing marketization is in China’s own self-interest.

Yet interlocutors charged that calls for a level playing field were just a smokescreen hiding America’s true intention of trying to limit China’s legitimate goal to pursue high technologies.

One economist defended Chinese policies by arguing there could not be a single definition of a market economy, and that in any case, the U.S. government intervenes a lot in the American economy.

To top things off, Xi’s highly anticipated speech this past Tuesday to mark the 40th anniversary of the Reform and Opening Era was a complete dud. Rather than using it as an opportunity to pivot in the direction of a new great leap forward in liberalization, he vociferously defended the China model and Chinese Communist Party rule.

He told the world to back off: “To implement reform and development in China with 5,000 years of civilization and 1.3 billion people, there is no textbook that can be used as an unchallenged principle, and there is also no one who can behave like an instructor to the Chinese people.” 

There is no way his speech could be a smokescreen to look tough outwardly while preparing to privately offer major commercial concessions to the U.S. in the coming weeks. Given the consistency of Xi’s messaging and actions over the past five years, such hopes are just wishful thinking. 

This stand-off appears unlikely to end soon. China’s economy has slowed and business confidence is at a decade low, but banks are not facing liquidity shortages, there is no chance of an exodus of dollars because of the closed capital account, and the leadership still has a wide range of stimulus measures, from lower taxes to new infrastructure projects, it could unveil if the economy further falters. China will continue to fight back. 

{mossecondads}Fitting for such a stormy period, I had to wait in line in a steady cold rain before making it into the stadium to enjoy a few moments provided by the pop idol. But to be fair, Bruno Mars was only in Shanghai to sing a few tunes at the end of a marketing event arranged by the Shanghai-based NIO to unveil its next electric-powered SUV.

Therein lies a source of hope, not necessarily in this company, which is young, unproven and situated in a sector staring overcapacity in the face, but in what it represents: a start-up composed of employees from dozens of countries with funding from around the world focused on innovating in ways that not only make them wealthy but also addresses serious social challenges.

Beijing and Washington seem further apart than ever in resolving their differences and equally distant from addressing their countries’ own respective domestic problems.

In the face of political gridlock, improving the world may have to come from unexpected corners of industry and the non-profit sector who creatively reimagine our challenges and our future. 

I couldn’t bring myself to jump up and dance, but quietly tapping my feet helped me escape the gloom and doom of the relationship for at least for a few minutes. Let’s hope the larger melody catches on.

Scott Kennedy is senior adviser and director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.