[New Year Special Commentary Series - EAI 2020 Outlook and Strategy] ⑤ The US-China Trade War and South Korea's Trade Policy: Middle Power Diplomacy for the Revival of Multilateralism and the Restructuring of the Regional Economic Order

Editor's Note

To mark the year 2020, EAI is publishing a series of six special New Year commentaries titled "EAI 2020 Outlook and Strategy."

1. Ha Young-sun: North Korea in 2020: A frontal assault on two major challenges (Published January 6, 2020)

2. Chun Jae-sung: South Korea's US-China Relations Strategy and US Strategy in 2020 (Published January 8, 2020)

3. Lee Dong-ryul: South Korea-China Relations and South Korea's China Diplomacy Strategy (Published January 13, 2020)

4. Sohn Yeol: South Korea-Japan Relations and Japan Policy in 2020: Conflict Resolution Seen by Broadening Perspectives (Published January 15, 2020)

5. Lee Seung-joo: The US-China Trade War and South Korea's Trade Policy: Middle Power Diplomacy for the Revival of Multilateralism and the Restructuring of the Regional Economic Order (Published January 20, 2020)

6. Choi Tae-wook: Electoral System Reform in 2019 and the General Election in 2020: Outlook and Tasks (Scheduled for publication January 22, 2020)

This is the fifth report in the special New Year commentary series "EAI 2020 Outlook and Strategy." It analyzes the US-China trade war and South Korea's trade policy, authored by Lee Seung-joo, Director of EAI's Trade, Technology, and Transformation Center and Professor at Chung-Ang University. After a prolonged period of difficulty, the first phase of the US-China trade negotiations has been concluded. Given that both sides have clear achievements and limitations, it is unlikely that either the US or China will achieve a unilateral victory in the trade war in the short term, and the future path remains uncertain. The author points out that the first-phase agreement is not the end of the trade war but merely one stage of a long journey, and argues that South Korea must respond systematically and proactively amidst future uncertainties. First, the South Korean government should emphasize that this agreement should be implemented in a way that benefits not only the US and China but also global trade as a whole, rather than responding independently to the external environmental changes brought about by the US-China trade war. It should also strive to redesign the multilateral global economic order through solidarity with like-minded countries. Regarding the changes in the regional economic order, the author argues that South Korea needs a strategic approach to lead the restructuring of a unified regional economic order in the medium to long term by harmonizing the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), while emphasizing the importance of domestic institutional improvements in preparation for the upcoming restructuring of the global trade order.

The US-China Trade War and the Phase One Deal: Outcomes and Implications?

‘Historic,’ ‘momentous,’ ‘landmark,’ ‘huge step forward.’ These are the rhetorical expressions used by President Trump and the trade representatives and Treasury Secretaries involved in the negotiations, such as Robert Lighthizer, Steven Mnuchin, when the first-phase agreement was reached on January 15, 2020, to find a breakthrough in the trade war that had fiercely unfolded between the US and China since March 2018. Meanwhile, China's official response was more subdued, stating that the agreement was a ‘mutually beneficial and win-win agreement’ that would foster stable economic growth and promote global peace and prosperity. The US-China trade war encompasses various aspects, narrowly defined as resolving trade imbalances between the two countries, broadly as a conflict between different economic systems, and even more broadly as a competition for hegemony. Furthermore, while the US and China prioritize resolving bilateral issues, they ultimately seek to secure dominance in the restructuring of the global economic order, making it inevitable that the conflict will expand to a multilateral dimension. To accurately understand the US-China trade war, it is essential to first comprehend these multifaceted and multidimensional aspects. The first-phase agreement represents the introductory phase of the long journey that is the US-China trade war. It is an interim settlement of the conflict and negotiations that have occurred between the US and China over nearly two years, and it also serves as an indicator for the future trajectory of US-China relations. In this regard, it is necessary to examine the specifics of the first-phase agreement and then re-evaluate it within the broader context.

The main contents of the first-phase agreement are as follows. First, the agreement consists of eight chapters: Chapter 1 on Intellectual Property, Chapter 2 on Technology Transfer, Chapter 3 on Food and Agricultural Trade, Chapter 4 on Financial Services, Chapter 5 on Macroeconomic Policies and Exchange Rate Issues, Chapter 6 on Trade Expansion, Chapter 7 on Bilateral Evaluation and Dispute Resolution Mechanism, and Chapter 8 on Final Provisions. Notably, the title of the agreement is "Economic and Trade Agreement," indicating that it is not limited to trade in a narrow sense but encompasses the broader US-China economic relationship. Chapter 1 is dedicated to intellectual property, reflecting the importance of intellectual property issues in the US's policy toward China and the extent of disagreements between the two countries on this matter. This chapter states that China 'recognizes' the importance of establishing and implementing a comprehensive legal framework for intellectual property protection. Chapter 2 concerns technology transfer, where both sides acknowledge that forced technology transfer is a significant concern and reaffirm the importance of ensuring that technology transfer occurs on a voluntary, market-based basis. Chapter 4 on Financial Services includes measures to lower structural barriers to market access in China that US financial firms have long sought, such as issuing licenses for asset management companies to US financial service providers to acquire non-performing loans held by Chinese financial institutions and providing non-discriminatory treatment. Furthermore, it was agreed to eliminate foreign equity restrictions in the life, pension, and health insurance sectors, as well as in securities, fund management, and futures by April 2020.

The agreement on resolving trade imbalances, one of the most keenly watched issues, is reflected in Chapter 6, Trade Expansion. China has agreed to import approximately $200 billion worth of US products over the next two years. China has committed to increasing imports of manufactured goods, agricultural products, energy, and services by $77.7 billion, $32 billion, $52.4 billion, and $37.9 billion, respectively. While the media focused on the fact that agricultural imports would more than double, the increase in China's imports from the US was relatively evenly distributed across industries. This can be attributed to the political and economic intentions of the Trump administration to recover the losses incurred by industries hit by the trade war. In return for China's commitments, the US has deferred the planned imposition of tariffs and reduced some tariffs, while maintaining tariffs on approximately $375 billion worth of Chinese imports.

How can the outcome of the first-phase agreement be evaluated? On the surface, it appears that the Trump administration has achieved a significantly favorable outcome in its dealings with China. The Trump administration has laid the minimal groundwork to attribute considerable significance to the first-phase agreement through the diplomatic rhetoric mentioned above. However, considering that the Trump administration defined China's various practices, such as industrial policies and subsidies, as 'economic aggression' in 2018 and set a goal of not only correcting trade imbalances but also inducing broad reforms in China, the significance of the first-phase agreement may be diminished. This is why, in contrast to the self-praise from Trump administration officials, numerous critical assessments of the first-phase agreement have been raised. Criticisms include that it merely 'stopped the bleeding,' that 'the implementation of the agreement and the second-phase negotiations are more important,' and that it was 'largely a deal on Chinese terms.' The core of the criticism is that the agreement does not contain anything that the Chinese government would strongly oppose, and it was at a level that could have been agreed upon years ago.

Meanwhile, as pointed out by China's Global Times, within China, there is an assessment that while both the US and China have certain regrets and are not fully satisfied with the first-phase agreement, it is 'relatively fair' from a broader perspective. It is also pointed out that the strategic value of the agreement needs attention, as 'discussions about gains and losses from the agreement's outcome tend to be exaggerated for political purposes.' The agreement provides an opportunity to restore a certain level of mutual trust, which had significantly declined during the prolonged trade war, thus holding sufficient strategic value. One should not make the mistake of overlooking the big picture by getting bogged down in minor details. Of course, while China did achieve some tariff reductions, the fact that tariffs on $36 billion worth of export items were not removed is a disappointing outcome.

The establishment of specific target figures for increased imports of US products is also a painful point for China. Specifically, Chapter 6, Expanding Trade, of the agreement explicitly states that China shall ensure an increase in its imports from the US by more than $200 billion during 2020-2021 compared to the 2017 baseline year. The annex to the agreement specifies figures by sector and by year. China has agreed to increase imports of manufactured goods by more than $32.9 billion in 2020 and $44.8 billion in 2021, agricultural products by $12.5 billion and $19.5 billion, energy by $18.5 billion and $33.9 billion, and services by $12.8 billion and $25.1 billion, respectively. This is disadvantageous to China, as it provides a significant basis for the US to monitor China's compliance with its commitments and to exert pressure.

What, then, can be inferred from the process leading to the first-phase agreement and its outcome? It has become evident through the first-phase agreement that neither the US nor China can achieve a unilateral victory, especially in the short term. The US-China trade war clearly contains elements of a hegemonic competition. China's rise is causing structural changes in global politics, and differing judgments and perceptions of these changes are accelerating the hegemonic competition. In other words, the process of hegemonic competition inevitably involves a superposition of structural changes, misjudgments about the meaning of these changes, and excessive confidence and anxiety towards the other party. From the perspective of the Trump administration, the US-China trade war resulted from a combination of anxiety about the likelihood of China's economic rise continuing, the recognition of the need for preemptive action, and confidence that there was a sufficient chance of success in pressuring China at the current juncture. Similarly, for China, President Xi Jinping's confidence that it is time to realize the 'China Dream,' moving beyond 'hiding one's capabilities and biding one's time' (韬光养晦) and 'peaceful rise' (和平崛起), coupled with anxiety about the pressure exerted by the US-led world order, led to the decision to escalate the trade war.

However, this first-phase agreement has served as an opportunity to impress upon both sides, as well as their domestic populations, that a unilateral victory is not realistically feasible for either the US or China. While the US has achieved certain results in resolving current issues, it faces a situation where core issues related to future competitiveness, the essence of hegemonic competition, must be deferred to the second-phase negotiations or beyond. China has also bought time until the second-phase negotiations by reaching a declarative agreement on some key issues, but promising quantified targets and a highly detailed implementation mechanism could tarnish the authority of the Xi Jinping regime, which has pursued power consolidation since coming to office.

Where is the US-China Trade War Headed?

With the first-phase agreement, the US-China trade war appears to have entered a temporary ceasefire. However, it is clear that this agreement is a 'ceasefire, not a peace treaty,' and the situation is merely calm on the surface. Great uncertainty looms over the future path, and the process of reaching a comprehensive trade agreement, as repeatedly stated by the Trump administration, will be even more arduous. Where will the US-China trade war go after the first-phase agreement? What factors will influence its trajectory? First, the US-China trade war is expected to follow a path of 'having started but not ending' (有始無終) for a considerable period, as it is difficult to conclude. Although Vice Premier Liu He introduced the Chinese proverb 'Every beginning is difficult' (万事开头难) at the signing ceremony at the White House, the US-China trade war is more likely to be the opposite. The US and China have initiated a trade war and even agreed to a first-phase deal, but finding an exit strategy for how to conclude it thereafter is by no means easy.

From the perspective of negotiation dynamics, the second-phase negotiations will differ from the first-phase in two ways, making their outcome difficult to predict. First, the negotiation process and stages are likely to be divided into many more steps than the first-phase negotiations. It took over a year to conclude the relatively simple first-phase agreement, and the second-phase negotiations are likely to be divided into multiple rounds, requiring a much more arduous process to reach an agreement. This is supported by Treasury Secretary Mnuchin's statement shortly after the conclusion of the first-phase agreement that "phase two may be 2A, 2B, 2C," indicating that it will be divided into multiple rounds. In terms of the nature of the issues, the second-phase negotiations will inevitably involve more intense and prolonged discussions. The second-phase negotiations are likely to focus on the structural issues of the Chinese economy that the US has long raised – subsidies, state-owned enterprises, and internet censorship. These issues are more complex and politically sensitive than those agreed upon in the first-phase agreement, requiring more intensive negotiations.

Second, although intellectual property rights and forced technology transfer issues were included in the first-phase agreement, they remain at a declarative level, unlike the expansion of US product imports or the opening of financial services markets. This means that issues concerning future competitiveness will effectively be dealt with in the next round of negotiations. The fact that the Trump administration finds the significance of the first-phase agreement in the 'enforcement mechanism' paradoxically foreshadows the unpredictability of the second-phase negotiations. While it is true that the enforcement mechanism in the first-phase agreement has been further specified compared to past US trade negotiations, for intellectual property rights, China has been required to publish an action plan detailing the methods and timeline for implementing agreed-upon measures and to publicly disclose the results regularly. This allows the US to use this information to measure China's compliance, representing a procedural improvement in the enforcement mechanism. Meanwhile, the issue of forced technology transfer, extensively addressed in Chapter 2 of the agreement, is declarative in nature. Given that the Chinese government denies forcing technology transfers, it remains unclear how the cessation of such transfers can be guaranteed. Furthermore, in terms of negotiation methods, the simultaneous pursuit of second-phase negotiations while the implementation of the first-phase agreement is uncertain could act as a structural impediment.

Third, as the influence of domestic politics becomes more pronounced, the impact of domestic politics will further increase the uncertainty of the US-China trade war. As soon as news of President Trump's tweet about the imminent conclusion of negotiations broke, predictions emerged within the US that it was merely a 'phony deal' in terms of content, an agreement for the sake of agreement. The first-phase agreement is a meager outcome compared to the goals initially proclaimed by President Trump, and it is argued to be merely a political achievement for President Trump, who needs to showcase the success of his pressure campaign against China as the 2020 presidential election countdown begins. While these criticisms may have some excessive aspects, this agreement will serve as a crucial test of the domestic political resilience not only for President Trump but also for President Xi Jinping, thereby setting the boundaries for concessions and compromises that both governments can offer in the second-phase negotiations.

Fourth, subtle signs of change in the Trump administration's economic policy toward China can be discerned from the process and outcome of the first-phase agreement. To understand this, it is worth reflecting on Trade Representative Lighthizer's perception of reality, who described the conclusion of the first-phase agreement as a 'historic agreement and a huge step forward.' In response to criticisms that the agreement's outcome fell short of expectations, Lighthizer emphasized that 'the economic interdependence between the US and China is a reality, and decoupling them is virtually impossible; therefore, it is more realistic to use this interdependence to pressure China.' China's agreement to increase imports of US products can be seen as a shift towards expanding balance rather than shrinking balance between the two countries. As Lighthizer argued, the Trump administration's strategy of weaponizing the economic interdependence between the two nations has yielded initial results.

However, this approach contrasts with the views of hardliners within the Trump administration, such as Trade and Manufacturing Policy Director Peter Navarro, who argue that economic exchange with China offers no benefit to the US and is instead exploited by China predatorily, thus necessitating bold and continuous pursuit of supply chain restructuring and decoupling. While the spectrum of the Trump administration's economic policy toward China is very broad, considering its weight in policy decision-making, future policies toward China are likely to be decided in a middle ground between the positions taken by Lighthizer and Navarro. This suggests that while the Trump administration may continue to pressure China and thus maintain uncertainty in US-China economic relations, efforts to decouple US companies from the US and China supply chains may be moderated in pace.

However, as China moves beyond its role as the world's low-wage manufacturing hub and pursues upgrades within the global value chain, it is unlikely to reverse the trend of diversification of supply chains by major multinational corporations, which has been underway since around 2017. Furthermore, as the Trump administration's strategy of using interdependence to pressure China becomes clearer, as argued by Lighthizer, China is also expected to pursue a trend of reducing its dependence on the US quantitatively and qualitatively.

Fifth, in a hegemonic competition, rather than a hegemonic war, especially in a preventive hegemonic competition waged by an incumbent hegemon, the key is not to fight with the past or present adversary but to envision the future world order and take preemptive measures accordingly. However, the first-phase agreement lacks a clear vision and roadmap for rebuilding the future world order and shows the Trump administration's haste in focusing on resolving current issues. Regarding the digital economy, there is only a mention of establishing a cooperation mechanism within the framework of the '2019 Osaka Declaration on Digital Economy' to discuss ways in which digital technology can benefit the agricultural sector, with no trace of fundamental and intense discussions on the core elements of the future world economic order.

South Korea's Trade Strategy to Navigate the US-China Trade War

The first-phase agreement is welcome as it has provisionally resolved the biggest factor of uncertainty in South Korea's domestic and international economic environment. South Korea has suffered indirect effects such as the imposition of high US tariffs, leading to a decrease in China's exports to the US and a subsequent decline in Chinese demand for South Korean intermediate goods as China pursues technological self-sufficiency. The conclusion of the first-phase negotiations is positive in that it has contained these sources of anxiety. However, considering that this agreement is merely one stage of a long journey rather than the end of the trade war, South Korea must develop systematic and proactive responses to future developments.

First, the government needs to emphasize that this agreement should be implemented in a way that benefits not only the US and China but also global trade as a whole. It is necessary to point out, in solidarity with other countries, that the first-phase agreement should generate positive impacts on global economic prosperity, not just mutual benefits for the US and China in a closed and exclusive manner. This was emphasized by President Xi Jinping in the speech read by Vice Premier Liu He at the signing ceremony and reaffirmed by Liu He in a press briefing after the ceremony, stating that the concessions provided to the US would also apply to other trading partners. Based on this, it is important for South Korea to make efforts to prevent trade diversion from third countries for some of the items China has agreed to increase imports of. In the case of agricultural products, although China is the world's largest importer of soybeans, projections suggest that it may be difficult for China to fulfill its promised increase in agricultural imports unless special measures are taken, such as replacing US soybean imports with Brazilian soybeans or storing them in warehouses after import. This phenomenon could also occur in the manufacturing sector; in areas such as semiconductors, electronic components, and automotive parts, there is a possibility that China may shift imports from South Korea to the US, necessitating close monitoring.

Second, South Korea's ability to independently respond to the significant external environmental changes brought about by the US-China trade war is inherently limited. This is why South Korea must redouble its efforts to combat protectionism and redesign the multilateral global economic order through solidarity with like-minded countries. While the US and China's resolution of their conflict is positive, the agreement has limitations as it fundamentally adopts a bilateral approach. In their haste to temporarily resolve current issues, the US and China seem to lack fundamental consideration for how to reshape the future global economic order. In response, South Korea needs to lead international efforts to revive the momentum of multilateralism. Germany and France have initiated the 'Alliance for Multilateralism' to revive UN-centered multilateralism amidst rising nationalism and isolationism, with countries like Japan, Canada, and Australia expressing their willingness to join. This indicates that major powers have already reached a consensus on the crisis of multilateralism. South Korea needs to lead multilateral cooperation in global trade or economic fields to create synergy effects and strengthen cooperation with like-minded countries through this linkage.

Third, regarding the changes in the regional economic order, South Korea needs to seriously consider ways to harmonize the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In November 2019, 15 countries, excluding India, initialed the RCEP agreement, amidst uncertainty about the future direction of the US-China trade war. The fact that the RCEP negotiations were effectively concluded, albeit with India's exclusion, signifies that countries in the region agree on the need for a regional response to changes in the global economic environment, such as the stagnation of global trade, increased regional integration in Asia, and disruptions to existing trade patterns. Meanwhile, the CPTPP has begun to serve as an institutional framework for countries benefiting from spillover effects, such as Vietnam, and those pursuing supply chain restructuring amidst the high waves of the US-China trade war, to continue pursuing regional economic integration. The issue is that not all participating countries, including South Korea and China, are members of both RCEP and CPTPP, and the levels, scope, and methods of economic integration pursued by RCEP and CPTPP still differ. If RCEP and CPTPP form a competitive relationship, it could become an obstacle to the restructuring of the regional economic order. Therefore, a strategic approach is needed to lead the restructuring of the regional economic order by harmonizing RCEP and the existing CPTPP. Japan has already demonstrated strategic multilateralism by exercising leadership in the process of concluding and implementing the CPTPP. South Korea needs to proactively develop a roadmap that ensures RCEP and CPTPP do not form an exclusive relationship in the short term but operate complementarily, and in the medium to long term, can form a unified regional economic bloc. To this end, preparations for the timing and method of joining the CPTPP must be seriously undertaken.

Fourth, it is essential to prepare the domestic institutional foundation in anticipation of the restructuring of the global trade order. The US-China trade war is essentially a game played for the future direction of competitiveness. While the US and China have so far engaged in a game of resolving current issues bilaterally, the front will shift to emerging issues, and it will transform into a complex game surrounding the establishment of a multilateral order. For emerging issues, including digital trade, rules and norms are not yet established within the existing global trade system. Therefore, the US and China are expected to pursue bilateral negotiations with each other as well as cooperation with other major countries. That is, the US and China are likely to strive to preemptively secure advantageous positions in the restructuring process of the multilateral order through bilateral cooperation with major countries. As seen in the case of the Digital Three Laws, the preparation of the institutional foundation raises concerns about missing the optimal timing for action. To adapt resiliently to the rapidly changing external economic environment, the preparation of domestic institutions related to emerging issues is urgent. ■

■ Author: Lee Seung-jooDirector, Trade, Technology, and Transformation Center, EAI; Professor, Department of Political Science and International Relations, Chung-Ang University. He holds a Ph.D. in Political Science from the University of California, Berkeley. His main research areas include international political economy, the international politics of trade, and global digital governance. His major works and edited volumes include "The Political Economy of Cyberspace" (edited by Lee Seung-joo), "Institutional Balancing and the Politics of Mega FTAs in East Asia," "Northeast Asia: Ripe for Integration?" (co-edited), and "Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions" (co-edited).

■ Managed and Edited by: Yoon Jun-il, EAI Research Fellow

Inquiries: 02 2277 1683 (ext. 203) I junilyoon@eai.or.kr

The [EAI Commentary] series is designed to provide a platform for discourse where experts from various fields can offer in-depth analyses and policy recommendations on major domestic and international issues. Please cite the source when quoting. EAI is an independent research institution independent of any partisan interests. The claims and opinions expressed in reports, journals, and books published by EAI are not affiliated with EAI and represent solely the views of the respective author.