The Good, the Bad, and the Never-Going-to-Happen of the China Trade Deal
Plus, who’s in charge of ISIS these days?
In this week’s issue of Vital Interests, we’ll discuss the Trump administration’s trade agreement with China, the Islamic State’s mysterious new leader, and the Pentagon’s desire to withdraw from Africa. This is an eclectic issue list, but to me, at least, it makes some sense. As I outlined in the first issue, the U.S. government is trying to pivot away from the 9/11 wars in the name of “great power competition”—never mind that much of that transition has already occurred.
On a personal note, you should know that I worked as an economist for more than a decade. Even though I’ve published articles since 2004, I haven’t written about economic issues at all. My public-facing work has been focused almost entirely on counterterrorism and security-related issues. Steve Hayes has encouraged me to delve into economics in this newsletter. So, if you don’t like what I have to say about President Trump’s trade deal with China, it’s Steve’s fault. You can let him know about it on Twitter. Or via email. Or by harassing Jonah Goldberg because he is obviously complicit in this, too.
A “landmark” trade agreement with China?
On Jan. 15, the White House announced the “historic” trade deal between the U.S. and China. Trump picked a fight with the Chinese early on in his administration, and he is claiming victory on behalf of the “American worker.” The agreement is “phase one” in a proposed two-step reckoning between the globe’s two largest economic powers. How successful has Trump’s trade war been? Well, it’s mixed.
President Trump used tariffs as a blunt negotiating instrument, taxing Chinese imports in order to create leverage at the bargaining table. Although the administration claims China pays the tariffs, there is ample evidence showing that the reality is quite different. In a research paper published by the National Bureau of Economic Research last year, three economists found “that the full incidence of the tariff falls on domestic consumers”—that is, Americans. And when foreign countries retaliate, their citizens bear the brunt of the tariffs as well, leading to lower real incomes across the board. Other studies have similarly found that the cost of Trump’s tariffs has fallen largely on American consumers and corporations. For example, one study found that the price of household washing machines rose 12 percent as a result of the tariffs in 2018. So did the price of dryers, even though they were not directly targeted by the tariffs, because they are a complementary good and, therefore, the sale price of both items is closely linked. This wasn’t so good for American workers.
As has been widely reported, though some of the Trump administration’s tariffs will be slashed, most of them remain in effect, as do China’s retaliatory measures. The administration has placed tariffs on more than $350 billion in Chinese goods, but those won’t be fully lifted until a “phase two” deal is reached. When that will be is anyone’s guess, and it might not happen at all. In addition, several key issues, such as the Chinese government’s subsidization of some industries, have been left for the second stage. It is doubtful that China’s authoritarian regime will relinquish control over companies deemed crucially important for its national security agenda.
Still, the “phase one” agreement addresses some prominent issues and I think President Trump and his advisers deserve credit for pressing them. Let’s discuss some of these issues here. Keep in mind that the Trump administration sought to renegotiate basically the entire economic relationship between the U.S. and China. These were intended to be structural negotiations—not just tit-for-tat talks concerning this-or-that tariff.
China implicitly concedes wrongdoing.
Much of the deal is focused on America’s longstanding grievances concerning China’s willful disregard for property rights. Although China won’t say so directly or publicly, Xi Jinping’s regime essentially conceded its own culpability in a number of areas, ranging from infringing patents and stealing intellectual property to forcing the transfer of sensitive technologies by companies seeking to gain access to China’s enormous market.
The negotiators addressed one U.S. complaint after another, spelling out remedies that were aimed at China’s behavior. Time and again the resulting text in multiple sections reads: “The United States affirms that existing U.S. measures afford treatment equivalent to that provided for in this Article.” Or something similar to that. In other words, American laws and customs already afford the types of protections the U.S. wants China to offer foreign companies—but hasn’t.
As I was reading through the intellectual property section of the agreement, I was reminded of the fake Apple stores that proliferated throughout China. They looked like real Apple storefronts, with real Apple employees and products that were indistinguishable from the genuine items. But these retail shops were knock-offs. After the practice was exposed in the press, the Chinese government shut down multiple locations, including 22 fake Apple stores in the city of Kunming alone. Still, copyright and trademark infringement, as well as the blatant stealing of technology, are commonplace in China. Sometimes this has been due to lax enforcement. In other matters, such as in the case of Micron, the Chinese government has allegedly orchestrated the thievery.
The Chinese behaviors outlined in the text of the deal are far-ranging, affecting numerous industries. To take just one other example, the deal addresses concerns over “counterfeit pharmaceutical and related products,” laying out three actions the Chinese have agreed to take. This includes the production of a published list of “enforcement measures, including seizures, revocations of business licenses, fines, and other actions” aimed at curbing counterfeit products. The very next line reads: “The United States affirms that existing U.S. measures afford effective and expeditious action against counterfeit pharmaceutical and related products.”
Again, it is difficult to read this as anything other than an admission by the Chinese.
However, while some provisions appear to be specific, others are vague. The U.S. wants China to allow firms to more easily challenge intellectual property disputes, but it remains to be seen if the Chinese legal system will be accommodating. This all comes down to China’s willingness to really play fair and the U.S. government’s ability to enforce the concessions offered on paper.
The big banks and other financial institutions like it.
JPMorgan Chase Chairman and CEO Jamie Dimon lauded the deal shortly after it was announced. His bank, the largest in the U.S. in terms of assets, has encountered numerous obstacles when trying to expand its businesses throughout China. Dimon quickly concluded that the deal presents a new opening.The Chinese “want JPMorgan to be there to help set transparency and standards and rules,” Dimon said during an interview with FOX Business’s Maria Bartiromo. He added that “the Chinese need, they want to eliminate corruption, have efficient companies and capital allocation, and they need very good financial markets.”
To my ear, Dimon’s take is a bit too rosy. (And I don’t understand why JPMorgan is no longer J.P. Morgan. I’m just not that hip.) Still, Dimon’s confidence is telling—he obviously sees the deal as a potential boon.
JPMorgan Chase isn’t the only big firm that is likely to benefit under the deal. Credit card companies—Mastercard, Visa and American Express—have had trouble expanding their client base due to Chinese restrictions. All three companies are explicitly named in the accord (see page 4-2), and the Chinese will supposedly expedite credit applications that were previously ensnared in a murky process that effectively stymied their businesses. Other industries, such as those focused on distressed debt and insurance, will supposedly enjoy more unfettered market access as well.
But again, enforcement is key.
On paper, China agrees to stop forcing technology transfers.
For good reasons, the Trump administration has made a big deal out of China’s forced technology transfers. The Chinese have strong-armed American and other foreign companies to turn over key technologies just to do business. They’ve done this by restricting foreign investments to those companies willing to play ball, enforcing joint venture requirements in which Chinese companies retain control, and using China’s deep bureaucratic state to abuse administrative and licensing processes. For a comprehensive summary of how this works, see this seminal March 2018 paper by the U.S. Trade Representative’s (USTR) office. It explains why the Trump administration has pressed China on this issue.
Taken at face value, the new trade deal says this practice is a thing of the past. “Any transfer or licensing of technology” is to be “based on market terms that are voluntary and reflect mutual agreement.” Neither side “shall require or pressure persons … to transfer technology to its persons in relation to acquisitions, joint ventures, or other investment transactions.”
On the surface, this sounds like a strong development. But according to the office of the U.S. trade representative , the Chinese government has “committed not to use technology transfer as a condition for market access and to permit technology transfer decisions to be negotiated independently by businesses” on “at least eight occasions since 2010.”
Obviously, the Chinese didn’t mean it. It isn’t at all clear how the U.S. will enforce China’s commitment now. This could very well be a Lucy-and-the-football type of situation.
China agrees to buy $200 billion more in American goods and services.
You can expect to hear President Trump boast about this provision repeatedly in the coming months. China has agreed to purchase $200 billion more in American “manufactured goods, agricultural goods, energy products, and services” by the end of 2021. This figure is in comparison to the “2017 baseline amount”—that is the amount of Chinese imports from the U.S. before Trump’s trade war.
Given the negative effects of the tariffs of American consumers and businesses, it is dubious that this $200 billion is a real windfall. While some will undoubtedly benefit, does the Chinese commitment outweigh the foregone sales and increased consumer prices over the past two years? That seems doubtful.
Still, the agreement does loosen restrictions of various agricultural products (meat, poultry, dairy, among others), baby formula, and other goods. That is a win for American producers.
In sum, the Trump administration is raising key issues that are vital to American interests. And the administration has advanced those interests in some ways, even if Trump’s tactics leave much to be desired. But as the cursory summary above should make clear, trade policy is incredibly complex and it would be foolish to assume that all of the issues discussed in the agreement have been put to bed.
Who is the Islamic State’s new leader and does it matter?
Abu Bakr al-Baghdadi, the Islamic State’s first supposed caliph, blew himself up during U.S. raid in late October 2019. In the months since then, there has been some ambiguity regarding the identity of his successor.
Baghdadi’s diehards quickly named their new caliph, identifying him by an alias: Abu Ibrahim al-Hashimi al-Qurayshi. The Islamic State’s followers around the globe are supposed to pledge their fealty to this man. Indeed, the group’s propagandists organized a media campaign celebrating the allegiance of jihadists everywhere from the Philippines to West Africa. What’s curious is that the jihadists have provided few biographical details about their new head honcho besides his nom de guerre.
In the days after Baghdadi’s death, I spoke to U.S. counterterrorism officials who said they suspected that Baghdadi’s replacement is Muhammad Sa’id Abdal-Rahman al-Mawla, also known as Hajji ‘Abdallah. They haven’t confirmed this identification on the record, but the U.S. government has been closely tracking ‘Abdallah’s jihadist career for some time.
In August 2019—two months prior to Baghdadi’s demise—the U.S. State Department offered a reward of up to $5 million for information on ‘Abdallah’s whereabouts. Foggy Bottom had already identified him as “a potential successor” to Baghdadi, noting that he supervised some aspects of the Islamic State’s global operations. ‘Abdallah’s career began during the days of the Islamic State’s predecessor organization, Al-Qaeda in Iraq, and he rose through its ranks since then. Eventually, according to the State Department, he became one of Baghdadi’s “most senior ideologues.” In that role, he “helped drive and justify the abduction, slaughter, and trafficking of the Yazidi religious minority in northwest Iraq.”
Hundreds of thousands of Yazidis were forced to flee their homes in northern Iraq as the jihadists rampaged through Sinjar and other towns. Baghdadi’s goons enslaved Yazidi children and women, forcing many of them to become sex slaves. Yazidi men who refused to convert to the Islamic State’s version of Islam were summarily slaughtered. And Hajji ‘Abdallah was one of the chief masterminds of this barbaric campaign.
Writing for the Guardian on Monday, Martin Chulov and Mohammed Rasool reported that “officials from two intelligence services” have confirmed that Abu Ibrahim al-Hashimi al-Qurayshi is in fact Hajji ‘Abdallah. Again, this is consistent with what I’ve heard, but it still hasn’t been completely confirmed.
Now, you may be asking: Does it really matter who this terrorist creep is? Yes, it does. I’ll give you some reasons why.
First, as Chulov and Rasool wrote, Hajji ‘Abdallah is from “an Iraqi Turkmen family in the town of Tal Afar” and “one of the few non-Arabs among the leadership.” This is important. Both the new Islamic State leader and his spokesman have “al-Qurayshi” in their aliases. The implication is that they are from the tribe of the Prophet Muhammad and, therefore, legitimate Islamic rulers. Baghdadi himself played this game, claiming descent from Muhammad’s tribesmen in order to burnish his legitimacy. This was always dubious. And it becomes even more unlikely if the new Islamic State chieftain is not even an Arab, but instead an ethnic Turkmen.
If the U.S. and its allies were adept at messaging—and, trust me, they are not—this is the sort of apparent discrepancy that would be trumpeted far and wide as part of a counterterrorist media campaign.
That messaging campaign would also highlight the fact that little else is known about the man deemed “Emir of the Faithful”. While we could get a message from “Abu Ibrahim al-Hashimi al-Qurayshi” any day now, he still hasn’t addressed the public, let alone explained himself. Given that thousands of men across the globe have decided to genuflect to this stateless ruler over the past two and a half months, one would think that this is the sort of problem the U.S. and its allies would be working overtime to highlight.
Consider that files recovered in Osama bin Laden’s Abbottabad, Pakistan compound, show that ambiguity over the identity of the Islamic State of Iraq’s first emir, a jihadist known as Abu Omar al-Baghdadi, caused some significant problems for al-Qaeda. Back then, from 2006 to 2010, al-Qaeda firmly backed the Islamic State of Iraq, telling Iraqis and others that they owed their allegiance to Abu Omar al-Baghdadi. But jihadist critics argued that no one really knew Abu Omar’s true identity or background, so it was absurd for anyone to declare their fealty to him. Bin Laden had to answer this charge in both his private correspondence and public statements. There’s more to the story, but the point is that this could be a real problem for the current Islamic State, which split off from al-Qaeda. But thus far the U.S. and its allies have done little to exploit it.
Finally, Hajji ‘Abdallah is a founding member of the Islamic State’s first incarnation, with his jihadist biography stretching back to the days of al-Qaeda in Iraq (circa 2003-04). If this is accurate, then it demonstrates, once again, that the former caliphate still retains key veteran personnel. This is true despite 16-plus years of war in Iraq, as well as an intense manhunt to find and kill all of the organization’s senior men.
That’s one reason that the group isn’t dead—despite the loss of its territory.
Will the U.S. military withdraw from Africa?
As I discussed in the first Vital Interests newsletter, this U.S. military is reportedly considering withdrawing most of its 6,000 or so troops stationed in Africa. Working with local allies, the U.S. has been trying to disrupt branches of both al-Qaeda and the Islamic State. In the name of “great power competition,” some in the Defense Department see this as a distraction from the threats posed by China and Russia. They make this argument despite the fact that the U.S. has approximately 370,000 personnel deployed as part of the Indo-Pacific Command—the largest American combatant command there is, by far. It’s not even close.
Secretary of Defense Mark Esper reportedly thinks the drawdown is necessary to adhere to the National 2018 National Defense Strategy. But that paper didn’t say the threat of terrorism had gone away entirely.
Esper’s planned withdrawal is now coming under scrutiny. The French government has criticized the plan, with President Emmanuel Macron describing America’s role as “irreplaceable.” France has several thousand of its own troops in Africa, but America’s logistical, military, and intelligence support is the best in the world. Leaders throughout West Africa say that America’s counterterrorism support is crucial and have called on the U.S. to stay. And as first reported by DefenseNews, both Democrats and Republicans on the House Armed Services Committee have called on Esper to reconsider his plans.
The possibility of an American withdrawal from Africa comes at a time when the jihadist menace is spreading across the continent. In a statement issued just this week, Al-Qaeda’s senior leadership emphasized the importance of the jihadists’ efforts in both East and West Africa. Two al-Qaeda branches are fighting to establish Islamic emirates—one centered in Mali and the surrounding countries, with the other in Somalia. The Islamic State has a significant presence as well.
Again, the U.S. doesn’t have hundreds of thousands of uniformed troops in Africa. The reported figure is about 6,000, with contractors and intelligence personnel adding to their numbers. Some Americans have died in battles, including recently in Kenya, and that is a significant consideration. But more often than not, local allies are leading the fight on the ground.
Calls to extricate the U.S. from “endless wars” are mounting and it may be the case that there are no American leaders left who want to explain why it is necessary to carry on. But if the U.S. decides to withdraw from Africa, it won’t be because “great power competition” beckons. It will be because there is no longer any will to fight terrorists over there.
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Photograph of Donald Trump signing the China trade agreement Vice Premier Liu He at the White House on January 15, 2020, by Jabin Botsford/Washington Post via Getty Images.