Whenever the U.S. and China meet for high level talks, China is awash in promises. They promise to rein in fentanyl chemicals to Mexico. They promise to buy more airplanes and LNG. Whatever it is, the promise usually leads to a lot of people thinking this time will be different – and the U.S. and China will return to the pre-trade war period where there were no Section 301 tariffs, no Section 232 tariffs on steel and aluminum, no Section 201 solar safeguards, no restrictions on products from parts of China like Xinjiang, and no export restrictions. Happy times, in other words, for companies who have long seen China as the replacement market to a stagnating, over-regulated U.S.
For China, promises kept are usually going to lead to promises broken. China never complies. In fact, just this year, the U.S. sent a delegation to discuss, for the umpteenth time, China’s adherence to promises it made to allow for third party audits of Chinese companies listed on U.S. stock exchanges. Brazil companies abide by those rules. Mexican and Japanese companies allow for third party audits. But China, still, does not. Yet, hope remains eternal when it comes to China.
Moreover, some of these agreements are never written down. The 2015 Obama-era industrial espionage agreement never took pen to paper. That same year, China’s leader Xi Jinping told Obama that his country had no plans to build military installations on the disputed Spratley and Paracel islands in the South China Sea. They did anyway.
While President Biden met Chairman Xi in San Francisco and the White House is touting yet another “agreement” between the U.S. and China, the U.S. China Economic and Security Review Commission released its annual report that provides a sobering reality check. Fentanyl and climate change are the latest repeat, based on a handshake on the sidelines of the Asia Pacific Economic Cooperation conference in San Francisco this week. While many are cheerleading another meaningless agreement that China will “promise” to adhere to, the Commission lays out the facts and sets the record straight.
China’s Communist Party (CCP) gives no sign of altering its policies, either at home or abroad. Beijing continues to reject cooperation with the United States on fundamental questions of national security, economics or trade. None of the flurry of visits and other diplomacy over the past year have resulted in any significant change of course by the CCP. The result of high-level meetings between the United States and China has been merely the promise of further meetings—that is, of more talk, rather than concrete actions. China now appears to view diplomacy with the United States primarily as a tool for forestalling and delaying U.S. pressure over a period of years while China moves ever further down the path of developing its own economic, military and technological capabilities. Beijing, in a continuing and deepening effort to challenge the existing international order, seeks to create a new one that will be aligned against the United States and its democratic allies in Europe, Asia, and elsewhere.
Here is a brief history of a few major promises that were trumpeted but should not have been taken seriously and were breached.
Fentanyl: Promised in 2019. Promised Again in 2023.
During a roughly four hour meeting on Wednesday, President Biden and Chairman Xi Jinping agreed to “reduce the flow of fentanyl” from China to the United States.
“We’re taking action to significantly reduce the flow of precursor chemicals and pill presses from China to the Western hemisphere,” Biden said, without saying the U.S. “It’s going to save lives.”
If this verbal agreement is anything like the 2019 agreement with Trump, heralded even by CNN as a major policy shift forced upon Beijing, then more deaths and more fentanyl are a guarantee. Drug overdose deaths by fentanyl were around 40,000 in 2019. By 2022, they were over 80,000, according to the National Institute of Drug Abuse. Most of the drugs come from Mexican drug cartels sending drugs by boat, and by individuals moving freely across the border. But according to the Customs and Border Protection Agency, fentanyl by mail was up in fiscal year 2023 ending in September, compared to last fiscal year. Pill presses are seized on a regular basis by CBP agents at international mail facilities. These are coming in from China.
From what CPA understands at this time, China agreed to create a working group on combating fentanyl chemical shipments, though it is unclear if this means to the U.S. or Mexico. In return, Biden agreed to remove the Institute for Forensic Science from the Commerce Department’s Entity List, which was added in 2020.
China’s Promise to the World Trade Organization
In 2000, China promised to lower its tariffs, eliminate non-tariff barriers, protect intellectual property rights, and open its markets to U.S. goods and services as part of its accession to the World Trade Organization (WTO). However, China distorts markets with overcapacity in manufacturing sectors via heavily subsidized state-owned enterprises and as a WTO member it leads in being charged with anti-dumping and countervailing duties.
China also has a closed market for a number of important U.S. businesses, like e-commerce players and social media platforms blocked behind the China firewall. For years, multinationals were told that to do business in China they had to set up joint ventures with Chinese companies who would later learn the tools of the trade, or steel trade secrets to compete directly with their former partner.
China Commits to Free Float the Renminbi
In 2006, the U.S. began its Strategic Economic Dialogue with China under then President George W. Bush. They continued under Obama and ended with Trump.
In 2014, at the sixth round of talks, China committed to exchange rate liberalization. This would allow for foreign market forces to determine the value of the renminbi. The mantra is that China will do this on their own time. It’s almost 2024. They have a managed exchange rate. Even if it is a slightly less managed one, this is not what they said they would do 10 years prior. The weaker currency, of course, makes China more attractive for imported goods.
Excess Steel Production: China Promises to Slow Down
At that same meeting in 2014, China committed to address excess steel production.
According to the Treasury Department, China promised to “establish mechanisms that prevent the expansion of crude steelmaking capacity” that are designed to achieve, by 2019, a reduction in excess capacity. This excess capacity of a global commodity lowers prices and makes it impossible for non-Chinese companies to compete at home, and in world markets. By 2019, China failed to do this and so was hit with Section 232 steel and aluminum tariffs.
Come 2023, China’s government is still grappling with the problem of over capacity, a problem those shaking hands on these deals may have little control over in a country where provincial leaders and their companies are too numerous to curtail.
China’s Climate Change Pledges
Xi has successfully played the West like a fiddle when it comes to climate change related policy. The two sides have been talking about climate change since the first Strategic Economic Dialogue meeting in 2006.
They agreed again on climate at the APEC summit.
Both countries “are aware of the important role they play” in combating climate change, and pledged to “work together to rise up to one of the greatest challenges of our time” the U.S. and Chinese governments said in a statement released Wednesday in China and Tuesday night in the U.S.
Yet, the climate agreements have mostly worked to give China a reason to overspend on new clean technologies and build national champions from CATL batteries soon to be in Ford EVs, to Jinko Solar and BYD Automotive. China controls much of the global solar supply chain, and is fast replacing Japanese and South Korea as the leader in manufacturing EV batteries. China is also home to some of the top wind turbine producers in the world, far surpassing anything the U.S. makes in this space.
China has spent upwards of $100 billion on coal-based steel production despite its carbon pledges, according to a report by the Center for Research on Clean Energy.
In 2022, China increased its capacity of coal plants, too. The only thing China is focused on when it comes to climate change is becoming a major corporate player in clean tech goods.
Phase One: China Doesn’t Hit Its Target
In 2019, China agreed to import more manufactured goods from the U.S. in the trade chapter of the Phase One trade agreement. This included manufactured goods like steel, aircraft and cars. Although one could argue that the pandemic made it harder for China to abide by much of that agreement, the USTR said in 2021 that it had no plan of renewing it because China failed to come close to its purchase agreement.
Opening Markets: A Standout Exception
Perhaps the main driver for all the fanfare over the latest China agreements is that China has delivered on opening its securities market to Wall Street.
That access used to be only granted to a handful of investment firms and only for Hong Kong stocks. Over the years, China made good on that promise to open markets to Wall Street. Now Wall Street is a major investor in mainland China stocks, known as the A-shares.
However, this serves China’s interest. It is a perfect lure for high finance and gives China free lobbying for allies on Wall Street who want to stay invested in China, and expand their list of clients in China. Heavy investment by Wall Street firms and Silicon Valley venture capitalists are beneficial to China because those investments become intertwined with Chinese interests. For open access to China’s market, big U.S. investors know it is unwise for them to anger the Chinese. They do not want Washington to restrict their access to the China market, something China can, and does, use to its advantage.
The APEC summit with Xi and President Biden is over, but there is a lot of fanfare over the possibility of China and the U.S. making amends. China says it wants an equal relationship with the U.S. and they don’t want to be at loggerheads with all the time. That’s something many multinational executives, who gave Xi a standing ovation at the Hyatt in San Francisco this week, can get behind because a return to the status quo means they can focus on building the China market. This would not be an issue if the U.S.-China relationship was balanced. A return to the status quo will worsen those imbalances.