They also understand, however, the domestic political implications of being seen, fairly or otherwise, as weakening the US approach to China.
So, the tariffs – described by Tai as “a blunt instrument” but also as seemingly “the only tool we have” – remain but the administration will create a “targeted” tariff exclusion process to ensure that they serve America’s strategic interests.
The US won’t pursue the “Phase Two” agreement that the Trump administration envisaged as the mechanism for tackling the more intractable trade issues – especially China’s state subsidies – but will “discuss” with China its performance under the “Phase One” agreement.
Under that deal China promised to buy $US200 million more US goods in 2020 and 2021 than it did in 2017.
According to the Peterson Institute for International Economics, which has been tracking China’s performance against its commitments, it is falling between about 31 per cent and 38 per cent short of the target for this year.
It has bought more of the things it would need to buy anyway and which trade at international prices, like agricultural products (92 per cent of the target) but has fallen well short on manufactured goods and other promised purchases.
The Trump’s approach to China was initially naïve, crude and evolved into something quite different at its end to its beginnings.
Tai is intelligent enough to appreciate the futility of trying to negotiate a Phase Two agreement that goes to the heart of China’s economic model and ambitions when it hasn’t complied with an agreement that is of far less consequence.
It’s also self-destructive to maintain tariffs on products that damage US companies, workers and consumers while having little, if any, impact on China.
Hence the development of a tariff exclusion process that is likely to be more extensive in practice than, given the political ramifications, the administration will be prepared to admit.
It’s not that the administration is going to go soft on China but rather that it realises that tariffs aren’t going to change China’s core strategies or its challenge to the US and therefore, while keeping some economic pressure on China via the tariffs and sanctions, what America does within its domestic economy to improve its own competitiveness is a more compelling approach.
In some respects the ambitious multitrillion-dollar Biden physical and social infrastructure programs (now struggling to attract consensus support within his own party) are an American adaption of China’s policies, albeit a far more limited one.
Biden does want to subsidise/incentivise investment in expanding strategic industries like semi-conductors within the US while maintaining sanctions and other restrictions – like the sanctions on Huawei and ZTE and the bans on the sale or transfer of some US technologies to Chinese entities – designed to thwart China’s ability to dominate the industries of the 21st Century.
Tai said the US would directly engage with China over its industrial policies and have “frank” conversations with her counterparts but the objective wasn’t to inflame trade tensions.
Tai also made it clear that the US will continue to try to enlist allies in a wider defence against “non-market” practices.
The US has been rebuilding trade relationships with Europe and other economies and supporting the multi–lateral institutions that were fractured by Trump’s anti–globalism and trade wars on everyone and, Tai said, would work with them to “reshape the rules for fair trade in the 21st Century.
Her articulation of the administration’s approach to China isn’t going to satisfy the China hawks in either of the Republican or Democrat camps (the Democrats are just as hawkish on China as the Republicans) but at least recognises that the crude tactics the Trump administration employed were largely ineffective and generated material self-harm.
The US isn’t going to be able to convince or coerce China into abandoning the state-centric economic model it sees as central to its ambition of displacing the US as the world’s leading economic and geopolitical power and therefore it is going to need to adopt a range of policies – including a somewhat greater role for government in directing aspects of its own economy – to protect that economic and technological leadership.