The New Chapter in U.S.-China Relations

As a part of the University of Chicago Harris School of Public Policy's continued focus on global engagement, Dean Katherine Baicker is currently on a multi-stop visit to Tokyo, Beijing and Hong Kong, giving lectures on her research and meetings with key stakeholders, policy leaders, alumni, and prospective students. Learn more about Harris Public Policy's focus on Asia below, with a focus on Chinese trade.

The U.S. and China are not only the world’s two largest economies, but also the two most connected. Together, the U.S. and China account for a quarter of the world’s trade. And their trade policies and practices directly impact the world economy by influencing industrial supply chains, financial markets, and world labor markets. 

In 2018 bilateral trade conflict and multiple rounds of escalating tariffs dominated the news and rocked global markets  And entering 2019, the world is watching eagerly as the U.S. and China restart trade negotiations. There are a number of issues on the table that can make or break this initiative: bilateral trade imbalances, market access, foreign investment, intellectual property theft – just to name a few. 

The sheer number of issues, their interconnectedness, and the diverging policy agendas of the two countries make understanding and gauging potential consequences difficult – and makes across-the-board agreement almost impossible. Yet understanding and gauging consequences are the precise goals shared by many policy institutions, including the University of Chicago Harris School of Public Policy and the Paulson Institute.  To ensure a way forward, policy makers have no other option but to decode such complexity and mitigate the high-stakes risks. 

Essence of the Trade War

Official statistics are sometimes slow to reflect the impact tariffs have on domestic economies, but early indicators suggest that negative effects have already emerged.

In the U.S., China imported zero soybeans in November of 2018, down from 4.7 million tons just 12 months earlier. And recent market volatility demonstrates that investors’ fear a full-blown trade war could end the longest running bull market since 2008. In China, traded conflicts are deepening an ongoing economic slow-down resulting from debt deleveraging. The International Monetary Fund had already lowered its forecast for China’s economic growth in 2019 from 6.4 percent to 6.2 percent.

In the current negotiations, trade issues and bilateral trade imbalances have taken center stage. So far, the U.S. has imposed a 25% tariff on $50 billion of imports from China, and another 10% tariff on $200 billion of imports. If the negotiation goes south, the tariff rate on the $200 billion in Chinese goods will jump to 25%. U.S. President Donald Trump has also vowed to tax every single dollar of Chinese imports that’s yet to be covered – another $250 billion. 

Though tension remains high, solutions are available. The Chinese side can engineer a short-term fix by promising to increase purchases of U.S. goods and services and thereby narrow the current  $370 billion trade imbalance. But beyond tariffs and trade imbalances,  the deeper issues of foreign investment, technology and industrial policy cast long shadows on U.S.-China relations – and will likely do so for decades to come. 

Chinese direct investment in the U.S., for example, is not merely an economic issue. It has the potential to impact national security and the future technology competition landscape. Policy and legislation reflect this reality. The first concrete regulatory change from the trade war has been in the foreign investment regime, not on the trade front. In August 2018, the U.S. Congress passed and the President signed the Foreign Investment Risk Review Modernization Act into law. The Act effectively limits access to critical technologies that foreign countries, China especially, may gain through mergers and acquisitions. 

In for the Long Haul

Long after headlines of the trade war fade, bilateral relations between the U.S. and China will be defined by underlying foreign investment, technology, and industrial policy issues. Artificial Intelligence (AI), for example, is a frontier that captures all three fundamental issues. It is a major focus of China’s industrial policy initiative Made in China 2025. Under this initiative, Chinese companies, both state-owned and private, are incentivized to invest in and develop AI talents and infrastructures. The application of AI will then revolutionize the real economy through industrial upgrades and efficiency improvement, which in turn will change the landscape of global trade and economic competition. While the current trade imbalance is a result of past policies, issues such as AI have the potential to shape the future we will live in. 

Harris Public Policy encourages and guides students to deploy critical thinking and decode complex policy issues. With a growing international student community, especially from China, the school strives to offer diverse opportunities to train future policy makers by engaging them with real-world policy issues. 

One productive avenue has been plugging students into the knowledge and resources of The Paulson Institute, whose mission is to strengthen U.S.-China relations and to advance sustainable economic growth. On the U.S.-China trade war issue, students can access data, policy analysis, and participate in fireside talks with policy makers through the Institute. Moreover, students can participate in the Institute’s fellowship program to apply knowledge they gain from the classroom to real-time analysis. 

Real World Practical Training

Beyond abundant resources on campus, Harris strives to draw expertise from affiliated institutions into the classroom. Harris’s Center for Economic Policy and the Paulson Institute have collaborated to offer a masters level research seminar on China Macro Policy, jointly directed by Harris professor Thomas Coleman and Paulson Institute’s researchers Joy Dantong Ma and Houze Song. The seminar aims to guide students through the entire process of policy analysis in the real world: from identifying policy a issue, to refining a research proposal, to collecting data, to making a final presentation. 

“The course helped students bridge the gap between general academic studies and more focused think-tank research, and in doing so help prepare them for their careers,” says Ma. “It’s a nice way to set up a talent pipeline for the Paulson Institute, but also for students to have more of a hands-on experience.” 

Coleman sees an even broader benefit. “There’s a huge set of vitally important policy issues with respect to China. We have a large number of students from China. The seminar is an opportunity for us to both expand upon and leverage our Chinese students’ expertise, context and knowledge, and bring different perspectives that enrich our classrooms and our community.”

Harris and The Paulson Institute will continue to work together as opportunities arise. “We have monthly China speakers here,” says the Institute’s Song. “We provide prominent scholars, practitioners, think tank people, and former officials who have experience and expertise on China to talk about their perspective—or give a book talk presenting their rigorous academic work on China.”

A Way Forward

The ongoing trade war between the U.S. and China is not a sudden turn in politics; it is an eruption of accumulated policy divergence over the past two decades. Structural de-escalation of this tension calls for a framework within which the two largest countries can collaborate and compete strategically. The design and building of such framework will depend on the type of policy leadership students at Harris and the Paulson Institute can provide: those that can apply deep regional knowledge, capacity for independent thinking, and political creativity in the real world.