John Pomfret: A China-U.S. truce on trade only scratches the surface of a broader conflict

The truce that President Donald Trump and his Chinese counterpart Xi Jinping announced over the weekend at the Group of 20 summit in Buenos Aires creates a pause in what is framed as a trade conflict. On a deeper level, however, the truce is between competing factions within the Trump administration that disagree fundamentally over how to pursue relations with China.

On one side are those, led by Treasury Secretary Steven Mnuchin, who believe that China’s leaders can be persuaded to stop stealing U.S. technology and respect U.S. intellectual property. On the other side are those coalescing around U.S. Trade Representative Robert Lighthizer, who contends that China’s pilfering of American technology and protecting its companies from U.S. competition are fundamental to the country’s economic strategy.

Trump, by postponing his threat to increase tariffs on $200 billion in Chinese goods to 25 percent from 10 percent, nodded to the Mnuchin wing of the administration, giving it a chance to prove that China is capable of reform. But in setting a short timeline (90 days) for the two sides to negotiate issues that have proved intractable in the past, and by reportedly appointing Lighthizer to lead the talks, Trump gave succor to those in the administration with an understandably jaundiced view of Beijing’s past commitments to change its ways.

The president also seemed less focused than he has been in the past on the U.S. trade deficit with China – widely seen by most economists as a red herring in the trade relationship – and more focused on, as he tweeted, leveling the playing field between U.S. and China firms.

Supporters of the Mnuchin view cite two developments in the talks that provide reasons for hope. Xi, in a move disconnected to the trade war, agreed to designate the synthetic opioid fentanyl as a controlled substance, meaning that shipping it to the United States will be subject to jail terms or even execution. This is significant because China has never paid much attention to controlling the export of anything other than weapons and has even denied its obvious role in the U.S. opioid crisis.

The second development involves Xi’s promise to revisit the decision by China’s antitrust regulators who failed to approve chip-manufacturer Qualcomm’s $44 billion takeover of NXP Semiconductors. U.S. officials believe that China’s regulators nixed the deal not for reasons of antitrust, but because China is desperate to make its own chips and views any strengthening of Western chipmakers with alarm. Xi’s willingness to revisit the Qualcomm transaction would constitute at least a tacit acknowledgement that China’s anti-monopoly regulatory system is biased against foreign parties and needs to change.

Still, China routinely makes commitments that it does not keep. Just remember Xi’s 2015 promise to then-President Barack Obama not to militarize the islands it created in the South China Sea. So the key question with the upcoming talks both for the factions within the Trump administration and between the United States and China writ large is whether China will follow through.

One issue that could impact China’s commitment will be Washington’s ability to create a united front with its allies to counter Beijing’s predatory trade practices. At the start of the administration, Trump failed on that front when he pulled the United States out of the Trans-Pacific Partnership – a pact joining 12 major trading economies along the Pacific Rim in a trade agreement designed to push back against China’s mercantilist behavior. But since then, the administration appears to have begun to bring friendly nations along – sometimes coercing them, other times cooperating.

U.S. officials who renegotiated NAFTA inserted a “poison pill” into the deal giving Washington a veto over Canada and Mexico’s other trade agreements to ensure that they would be governed by market principles and don’t give benefits to state-owned companies. Secretary of Commerce Wilbur Ross said the United States would seek to include this provision in any subsequent deals with Japan and the European Union and acknowledged that the target of this provision is China.

In other areas, officials from the United States and other members of the Five Eyes intelligence alliance that includes Britain, Canada, Australia and New Zealand report robust dialogues over coordinating the Western response to China’s rise. A new U.S. law, signed by Trump in August, FIRRMA, mandates that the United States conduct a “more robust international outreach effort” to persuade allies to adopt stronger protections against Chinese attempts to buy or steal Western technology. Germany, in consultation with the United States, has already taken steps to limit the ability of Chinese firms to buy high-tech German companies.

Within the administration there is still substantial support for continuing the tariffs. One senior administration official said most officials generally agree to “let the pressure ride” on China and focus on concluding trade deals with other partners first. Japan and the European Union, Britain, the Philippines and possibly Taiwan, he said, would naturally take precedence over China.

Still, Trump’s madcap unpredictability – and his juggling of the factions within his administration – make anything possible. But if there is one issue in Washington where there exists bipartisan consensus, it is on the necessity of a tougher policy on Beijing. The old American strategy – to facilitate China’s rise on the hope that China’s system would evolve in a more liberal direction – has failed. And a new strategy, in fits and starts, is taking shape.