Phase One Is a Failure

Secretary of State Mike Pompeo recently suggested the United States should approach China with a “distrust and verify” mindset. If the secretary speaks for President Donald Trump, the phase-one trade deal with China is on its last legs. The question should be what comes next. The best answer is targeted retaliation to deter China’s predatory economic and security behavior. It is certainly not more grand bargains.

Phase one’s pillars are expanded American exports, greater Chinese respect for intellectual property (IP), and additional access to China for American financials. But the U.S. Congress and the Trump administration are already undoing the third, rightly recognizing that the United States does not want to provide China with even more funds.

The IP component borders on meaningless. Beijing published new regulations, but laws were not the problem in the first place. China has no law requiring IP transfer in exchange for market access, nor any measure rewarding IP thieves. Coercion and theft are constant nevertheless. U.S. officials report opening a new China-related espionage case every 10 hours.

The Trump administration’s investigation into China’s IP practices noted annual U.S. losses of at least $225 billion, outmatching phase one’s $200 billion in export gains over two years. Yet the administration has never mentioned the resources assigned to scrutinize IP or deal results to date.

For 2020, the phase one deal thus comes down to exports. The United States just announced goods exports to China in the first half of this year fell 5% compared to the first half of 2019. In the first year of phase one, goods exports were supposed to rise $5 billion per month over the base year of 2017. To date this year, they’ve fallen $1.5 billion per month versus 2017. Including partial services import results, China is $40 billion behind its commitments.

COVID-19 is only one reason. Through June, China reported that total imports fell 3% versus 2019. Imports from the United States fell 9%. Despite phase one, American goods are underperforming the overall trend. In the two months of new trade numbers that will be released before the election, the United States can hope to close $8 billion of the $40-billion gap. If phase one is not doomed, it should be.

Trump followed former U.S. President Barack Obama’s lead in making deals with China at the end of an administration. These efforts aimed to require improvement in Chinese economic behavior for friendly U.S.-China relations to continue. Despite loud speeches, the Trump administration’s economic actions over the past six months have been tentative, paralyzed by the hope of soaring exports. Beijing has successfully called Washington’s bluff, playing for time.

A new administration, whether led by Donald Trump or Joe Biden, will have to try a new approach. There is a simple template that goes beyond additional tariffs. Rather than conditioning the U.S.-China political and economic relationship on massive structural changes in China’s economy and trade practices, U.S. officials should adopt much more targeted policies.

The United States is already doing so in its responses to China’s human rights violations and destabilizing security behavior. Recent U.S. moves have included sanctioning Communist Party leaders involved in repression in Hong Kong and ethnic cleansing in Xinjiang. State Department officials have also warned that sanctions may be forthcoming for entities and individuals that are violating international law in the South China Sea.

Applying these targeted tools in the economic relationship is an obvious next step. It is time to implement tighter export controls, which passed Congress overwhelmingly two years ago, but were then stalled by the administration. These go far beyond the non-stop chatter about Huawei. Another step is relocating medical and pharmaceutical supply chains out of China. That process should have begun in March, as the virus spread, yet almost nothing was done.

On the security front, it is finally time to penalize Chinese banks that are violating UN sanctions and propping up North Korea. The same holds for Chinese oil and gas companies illegally exploiting the exclusive economic zones of Vietnam, Malaysia, and other South China Sea claimants. There should be restrictions on American investments that assist the People’s Liberation Army.

Phase one is a failure, and it’s past time to reassess our approach to harmful or dangerous Chinese actions. The Chinese leopard did not change its spots in 2016 or 2020 and will not change with yet another “mutual understanding” with the next administration. Targeted penalties for the full range of malign behavior are far superior to the broad, hopeful deals we have tried in the past.

 Zack Cooper is a fellow at the American Enterprise Institute and co-director of the Alliance for Securing Democracy. Derek Scissors is a resident scholar at the American Enterprise Institute and chief economist of China Beige Book International. The views expressed are the authors' own.