Hira Bahadur Thapa

First coined by American strategist Edward Luttwick, geoeconomics is defined by Robert Blackwill and Jennifer Harris as the “use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results”. US-China economic interdependence is going to reshape their diplomatic challenges as they compete for their influence on global affairs.

Thucydides trap
Graham Alisson, a professor of international relations, has dubbed the ongoing competition between the two big powers of current world as the Thucydides trap. It means that they are constrained to rival each other as an established power and a rising power. This analogy may have truth behind it but growing trade relations between them will create conditions for them to strengthen their ties. They can hardly decouple their economies. This economic interconnectedness fueled by expanded trade ensures security more than anything else.

Between trade partners, problems arise sometimes when one party blames another for not being fair in exports and imports. US-China trade history is no exception to this. During Trump presidency, tensions rose high with China when the US accused that the American exports were not given fair treatment leading to increase in trade deficits. Long negotiations between their trade officials finally led to a trade deal known as Phase 1 in January 2020, the final year of the Trump administration.

Before the conclusion of the aforementioned trade agreement, the US position was that the Chinese had been pursuing economic practices that hurt the American economy. The cheap Chinese imports were inhibiting US farmers’ production, making their products less competitive in the market. But when the US administration decided to impose tariffs on Chinese products to decrease imports, it proved counterproductive because the American consumers were forced to pay higher prices.

Therefore, a trade agreement between the US and China was negotiated in 2020 with the expectation that the latter would address unfair economic practices and endeavour to address the US trade deficit. In order to meet this objective, China promised to purchase additional $200 billion of American products, including energy, services, food and manufactured goods, over the course of 2020 and 2021.
While reviewing the trade situation of the US and China, it has been revealed that China is on pace to fulfill only 60 per cent of the purchasing commitments it made in the trade deal by the end of 2022, after buying fewer airplanes, automobiles, crude oil and other American goods than anticipated. In this connection, the Chinese side has argued that a few factors beyond their control were responsible for failing to meet the promises of increased imports from the US.

They have cited the global pandemic, factory stoppages and shipping disruptions as reasons for the shortfalls, which are not illogical. At a time when the Biden administration promised to take a different approach to China compared to his immediate predecessor, whom he has accused to have failed to fully take care of American trade concerns, it is interesting to see how US trade relationship evolves with China. According to the trade deal, the trade partners may have further consultations if an “unforeseeable event outside of the control of the parties delays a party from timely complying with its obligations”. The same deal also permits the United States to take remedial measures like imposing tariffs, if China is seen to be in violation of the agreement and the two governments cannot reach a consensus.

Given the growing calls from the American businesses and consumer groups for the Biden administration to slash the tariffs that Trump imposed on Chinese goods, it is unlikely that punitive remedial measures will be prudent. These calls are based on the fact that US tariffs on Chinese goods have driven up costs for American companies and consumers. The US has already imposed tariffs on roughly two-thirds of Chinese imports. Any further expansion of tariffs on other goods are sure to place a heavier burden on households and businesses at a time when inflation is raging in the US economy triggering a debate in the Federal Reserve Board about how to tame it.

Here the quote from the US Trade Representative Katherine Tai is worth recalling. Tai has admitted that China’s performance has not been perfect. To her, what does the US do in this regard is an important question. Engaging with China is the right thing to do in her opinion, which testifies that expanding and not squeezing the trade is the appropriate policy.
Although US President Joe Biden and his deputies have criticised the trade deal for failing to address many of the most pressing trade issues that the US has with China, they have since promised to uphold it. In November when Biden held his first virtual summit with his Chinese counterpart Xi Jinping, he also underscored the importance of China fulfilling the trade commitments. Purchasing commitments are just one component of the trade deal. It contained promises to streamline China’s import process, and ease barriers for American financial firms doing business in China, among other reforms.

The Chinese have clarified that the economic and trade relations between the two countries were essentially mutually beneficial. Issues of bilateral economic and trade relations should be properly dealt with in the spirit of mutual respect and equal-footed consultations. There is no denying the fact that US-China trade deal was serving as a foundation for the relationship that focuses on important structural changes to China’s economy.

Strategic influence
It is beyond any doubt that China has converted its economic heft into strategic influence. It has embraced globalisation to become the top trading partner for more than two-thirds of nations worldwide. As a global economic actor, China is central to the prosperity of American people, its allies and partners. Despite the many divides between the US and China, each will need to be prepared to live with the other as a major power. If the US wants to establish a fairer and more reciprocal trading system, it simply cannot go alone. Geoeconomics is the key to determine future economic relations between them.

(Thapa was Foreign Relations Advisor to the Prime Minister from 2008-09. thapahira17@gmail.com)