Trading Complexity

  • 25 January 2021 (5 min read)

Key points

This week we take a breather from commenting on the latest developments on the pandemic, the cycle and policy-making to focus on trade and investment relations between the US, China and the European Union, and more broadly the new conception of economic foreign policy under the Biden administration.


In her confirmation hearing Janet Yellen sounded quite belligerent on the trade relationship with China, expressing a readiness to use “a full array of tools” to deal with China’s “abusive, unfair and illegal practices” which would suggest that the Donald Trump era, on these issues, is not fully over. Still, while tension will remain significant, and we don’t expect the remaining tariffs from the previous administration to be rolled back quickly, we think that the new team in Washington DC will adopt a subtle attitude.

We draw from a paper co-authored by Jake Sullivan, Joe Biden’s new National Security advisor, “Making US foreign policy work better for the middle-class”. While the report considers that in the two decades before Donald Trump’s ascent US economic diplomacy failed to consider the adverse distributional effects of globalization at home, it still espouses a generic “pro-trade” approach and takes a nuanced view of China. The report breaks with the “America First” stance by recommending a strengthening of the multilateral system, in particular the WTO, with support from the US traditional allies. Biden will be tested quickly on this, since the WTO has just found against the US in a trade dispute with South Korea which dates back from the Obama administration. The new US President could take this opportunity to unlock the dispute-settling system of the WTO and draw on a common position established two years ago with the EU and Japan to reform its rulebook when it comes to state subsidies or forced technology transfers, two major causes of tension with China.

However, Biden’s leverage on China may not be massive. His team is not fond of unilateral tariff hikes, and financial sanctions are not a risk-free alternative to trade war. Moreover, his capacity to enlist allies against Chinese trade practices may be limited, now that the EU has discovered, with the Comprehensive Agreement on Investment (CAI) signed with Beijing, that they may not need to side with the US to get concrete results.

The CAI is of course a way for Beijing to put a wedge between the US and the EU, but beyond the geopolitical motive, it may reflect a genuine change of course in China on opening its market to foreign operators. There is a narrow path for a more cooperative approach on trade issues between China and the US. Overcoming mutual distrust over each other’s status on the world stage is the main hurdle, but we think international trade issues will be less explosive during the next four years.

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