Eakinomics: 2020 and China

There will be lots of important events in 2020 – notably an election – but perhaps no bigger issue is on the table than the future of the U.S.-China relationship. For the past year and a half, the basic stance of U.S. policy has been to enhance economic separation from China. The theory of tariffs was that they would force the Chinese to negotiate fairer terms of trade, diminish the appetite for Chinese goods, and relocate supply chains away from China and, perhaps, toward the United States. Blacklisting companies like Huawei would improve national security and increase the demand for U.S.-made components.

How well this has worked is open to question. Clearly, there has been negative fallout from the trade war on the United States, China, and the global economy. The trade war has reduced the pace of economic growth, raised the prices of some goods, and invited retaliation on key sectors. But all this does not necessarily mean that the tariffs “failed.” After all, those undeniable economic costs could be outweighed by benefits gained in the negotiations. It remains to be seen if the two countries sign a significant set of reforms in the “phase 1” agreement or any follow-on trade deal, but history may conclude that the tariffs were worth it. It could also conclude that they were not.

But the notion that ever-greater separation from China is a good idea is simply misplaced. It would be a step backward to divide the world into two spheres – one with trading and economic relations with the United States, and one with those arrangements with China. That would guarantee missed economic opportunities all around, including the loss of the largest market for U.S. firms.

Some will argue that these losses are offset by national security gains, but an isolated China is probably more dangerous. After all, countries regularly linked by the flow of goods and capital are also countries engaged in the exchange of information that improves understanding. And, they have a more naked economic interest in the continued well-being of the other.

The United States and China simply will have to remain economically engaged while hashing out differing worldviews and national security objectives. 2020 is the year to start a relationship that both furthers U.S. interests and does not constitute simply cutting off trade with China.