Who Has the Upper Hand in US-China Relations?

Who Has the Upper Hand in US-China Relations? (YouTube link)

In the above video, Larry Summers, a Harvard economist, and Elizabeth Economy, a China expert, focus on the U.S.-China trade relationship, analyzing a tentative 90-day tariff reduction agreement and its implications for both economies. 

Key points include:

Trade Agreement and U.S. Retreat:

• Larry Summers views the agreement as a positive step, primarily because the U.S. backed off from "imprudent" high tariffs that risked economic damage. The U.S. stock market rose, particularly import-dependent sectors (e.g., retailers, toy companies), indicating relief rather than Chinese concessions.
• Summers praises Secretary Bessant’s leadership but frames the move as a retreat from an overly aggressive U.S. stance, salvaging pride while avoiding economic harm.

Pressure Points and Vulnerabilities:

• President Trump believes China faces more pressure due to its manufacturing-heavy economy and quiet factories. However, Summers argues the U.S. faces greater pressure as a democratic, inflation-sensitive nation where tariffs raise prices.
• Elizabeth Economy highlights mutual vulnerabilities: China’s economy has been slowing for three years and relies on U.S. exports, but the U.S. depends heavily on China for critical goods (e.g., rare earths, pharmaceuticals). The Trump administration underestimated this U.S. reliance, miscalculating the tariff war’s impact.

Dealing with China’s Centrally Planned Economy:

• Summers suggests focusing on U.S. core interests, such as national security and protecting intellectual property, rather than minor issues like toy imports or iPhone assembly. He views Chinese subsidies as potentially beneficial to U.S. consumers and producers if strategically managed.
• Broad, indiscriminate tariffs are criticized as inflationary and harmful, making the recent U.S. adjustment a step forward.

Global Dynamics:

• Economy notes that China expected to rally global support against Trump’s tariffs by positioning itself as a stabilizing force. However, advanced market democracies have not aligned with China, favoring the existing rules-based order without fully including either the U.S. or China.
• This global reluctance limits China’s ability to counter U.S. pressure through international alliances.

China’s Domestic Consumption Shift:

• Chinese economists advocate for boosting domestic consumption by investing in healthcare, education, and pensions to reduce high savings rates. However, Xi Jinping resists “social welfareism,” wary of reducing work incentives.
• Recent measures include raising civil servant wages (possibly reversing prior cuts), encouraging bank loans to small enterprises, and platforms like Alibaba lowering costs for exporters. These steps fall short of the significant consumer stimulus needed.

Mutual Goals and Challenges:

• Both nations aim to rebalance their economies: the U.S. toward high-precision manufacturing, China toward consumption. A cooperative approach could benefit both, but vulnerabilities and strategic missteps complicate negotiations.
• The tentative agreement leaves significant work for a long-term solution, with both sides needing to address economic dependencies and global positioning.

Key Takeaway: 

The U.S.-China trade truce reflects a U.S. retreat from aggressive tariffs, driven by domestic inflationary pressures and mutual economic vulnerabilities. While both nations have rebalancing goals, miscalculations, China’s resistance to consumer stimulus, and a lack of global support for China complicate a lasting resolution. Strategic focus on core interests, particularly U.S. national security, is critical to navigating this rivalry.