After the Biden administration released its formal trade agenda to Congress, its most glaring message was absent — that the United States would use dispassionate reason to restore business and economic relations with China. It did say, though, that Trump’s tariffs would remain in place, for now.
It’s like having a grown-up in the room — someone mature enough to see the big picture and to recognize that most global corporations want to sell to China’s burgeoning middle class. But China’s economic growth and leverage have changed the market dynamics. That is, China is not the poor country that takes whatever crumbs its rich friends will toss it; rather, it is the world’s economic engine that can now dictate terms. What’s next?
In the short term, it alters the chessboard and the global energy picture: China is now engaged with Russia to buy its oil while it may also look increasingly to the Middle East for petroleum. The United States, meanwhile, will lose that oil and natural gas business in China but will look more and more to European markets. The Biden administration is thinking long term: China has vowed to be carbon neutral by 2060. And that necessitates it reducing its fossil fuel usage and investing heavily in green technologies — the kinds of products that Americans want to sell. Electric vehicles and battery storage, for example, are hot “commodities.”
“China doesn’t necessarily play by Western rules,” says Aaron Rutstein, risk director for the Americas with Atradius that is a trade credit insurance provider. “It acts more like an emerging country when it comes to such issues as intellectual property and it does not necessarily compete on a level playing field.
“The Trump administration turned this into a populist issue,” he continues, in an interview with this writer. “But he singled out China as a strategic adversary — strong enough to be viewed as a potential disrupter and an economic threat. He made China the scapegoat. But it is not responsible for the decline of America’s middle class. The consensus is that Biden will normalize relations.”
Both the Federal Reserve Bank of New York and Moody’s Analytics have said that the trade war has hurt the gross domestic product while it has damaged job creation. Bloomberg Economics adds that the trade war with China will end up costing the U.S. economy $316 billion. Nearly a third of the U.S. economy is tied to trade with China.
“The Biden Administration will review past trade policies for their impacts on, and unintended consequences for, workers,” says President Biden’s 2021 Trade Agenda released in March. “Through bilateral and multilateral engagement, the Biden Administration will seek to build consensus around trade policies that address the climate crisis, bolster sustainable renewable energy supply chains, level the playing field, discourage regulatory arbitrage, and foster innovation and creativity.”
But the president will not immediately remove the tariffs imposed during the last administration. Trade analysts say that it will be used as leverage during future trade talks that will most likely be bilateral. The multilateral Trans-Pacific Partnership is “ancient history,” says Rutstein.
Taking sledgehammer to the Chinese failed miserably. Moreover, the agreement that the Trump administration had later negotiated has flopped: China had agreed to buy $200 billion worth of American goods and services, including liquefied natural gas. But such a pledge was doomed from the onset; China can’t dictate where its privately-owned businesses buy products any more than the U.S. can.
American businesses object to the tariffs imposed against China. High-tech giants like Cisco, Google
Businesses with high fixed costs can’t just move their factories out of China. It takes time and money to do so. Others, however, may try to hedge their bets and particularly those with more flexible operations.
“Companies are more aware of how these supply chain disruptions can manifest themselves,” says Aaron Rutstein. “They need redundancy. It could be as simple as stocking inventories and diversifying the supply chain. But there will be fallout for the next several years. Changing supply chains does not happen on a dime.”
Companies ranging from Tesla
But the damages have been done. And it will take some time to fix. “Trump catalyzed the issue,” says Rutstein. “A block of the American public now views China as a strategic adversary and politicians will take this into their calculus. Biden won’t let things deteriorate but he still has to resolve key trade disputes.”
The current president, though, has his eye on the ball — to heal the wounds and get back to business. The longer the delays, however, the harder it becomes for American companies to sell green products and services to China, which is among Biden’s most important goals.