Zha Daojiong on China-U.S. economic & trade issuesThe Peking University professor discusses Tariffs, Sanctions, Liquefied Natural Gas, Manufacturing, etc.
The following is based on a December 29, 2024, speech by Professor Zha Daojiong of the School of International Studies and the Institute for South- South Cooperation and Development at Peking University (PKU). He made the speech at a PKU National School of Development (NSD) forum under the theme “China’s Economy 2025.” The NSD’s WeChat blog published the Chinese transcript on February 27, 2025. 查道炯：中美经贸的要点与外部挑战应对Zha Daojiong: Key Points of China-U.S. Economic and Trade Relations and Responses to External ChallengesIn my discussions with entrepreneurs, I often encounter the following question: The United States continues to maintain tariffs on China and may even increase them while sustaining high-pressure measures against China in areas such as technology and investment. In this context, which countries are more friendly toward China and welcome Chinese investment? Whenever I hear this question, I always hesitate. In my view, if one genuinely wishes to expand business and achieve internationalization, merely considering which country welcomes us is far from sufficient. Tariffs: What Is the U.S. Logic?Regarding China-U.S. relations, tariffs remain a focal point of debate. People frequently ask: Which Chinese products might be subject to additional U.S. tariffs in the near future? What will the specific tariff rates be? Will the U.S. eventually end its discriminatory tariff policies against China in the medium to long term? It is essential to recognize two fundamental trends in U.S. tariff policies toward China: 1. New tariff rates are added on top of existing ones. 2. The U.S. dynamically adjusts tariffs on specific products or entire product categories based on changes in its domestic market. In other words, the U.S. tariff framework for Chinese exports follows a pattern of perpetual escalation with case-by-case adjustments and no upper limit. >From the perspective of textbook economics, China remains the third-largest source of U.S. imports, and imposing tariffs on Chinese goods inevitably increases inflationary pressure in the U.S. and worsens the financial burden on its low-income consumers. However, it is crucial to understand that tariff policies align with the U.S. political process. Tariffs generate government revenue while enabling tax cuts for the wealthy and corporations. The revenue from tariffs helps offset fiscal shortfalls caused by tax reductions, alleviating government financial pressure. While consumers bear part of the cost, as the world’s largest consumer market, the U.S. can always find alternative sources of imports and push prices down. Thus, China and the U.S. frequently struggle to reach a consensus on this issue. For the U.S. fiscal system, imposing tariffs aligns with domestic political operations, satisfies certain business interests, and does not create additional fiscal burdens. Since 2017, both Republican and Democratic administrations have maintained tariffs on Chinese goods, with the Biden administration even expanding the scope. Given that the U.S. domestic political system revolves around an ongoing election cycle, tariffs remain a politically attractive policy tool. Politicians use tariff policies to assure the middle class of job security and gain their support. Here, the “middle class” is broadly defined, encompassing individuals and groups struggling with industrial shifts and automation, facing significant challenges in reemployment and retraining. Additionally, labor unions often support tariffs, believing they help protect jobs. Since labor unions hold considerable sway in elections at all levels, from federal to local, tariffs have become a frequently used political instrument. In recent academic exchanges, American colleagues have frequently mentioned the still-active “Chicken Tax.” This 25% tariff was imposed by the U.S. in 1964 on light pickup trucks imported from France and West Germany as retaliation for their tariffs on American chicken exports. The underlying message, in my understanding, is twofold: 1. China should be patient regarding U.S. tariffs, as historical precedents show that such policies are deeply ingrained in American trade practices. 2. China should focus on avoiding tariff rates that are higher than those imposed on other import sources. At the same time, some U.S. companies have successfully lobbied the government to exempt certain products—whether finished goods or components—manufactured in China from tariff lists or to grant temporary adjustments. Among the businesses advocating for tariffs on Chinese goods, there are both wholly American-owned companies and foreign-invested enterprises operating in the U.S. The latter category has been particularly common in recent years, especially in the semiconductor industry amid heightened competition. Given the current situation, negotiating tariff reductions through diplomatic channels appears to have limited feasibility. The U.S. is likely to continue justifying its selective tariffs under domestic laws such as Section 301 of the Trade Act of 1974—or even older legislation. On the international level, both China and the U.S. are members of the World Trade Organization (WTO). The organization has nearly reached a state of paralysis in recent years. For example, the WTO’s Appellate Body lacks judges, making it impossible to issue enforceable rulings. Even if a ruling is issued, there is no guarantee that member states will comply. A more pressing issue is the national security exception clause in the WTO charter, which allows member states to take necessary actions in the name of national security, exempting them from trade agreement obligations. Against this backdrop, the U.S. Department of Commerce has assumed a leading role in safeguarding national security by restricting the export of the country’s most advanced computer chips to maintain its competitive edge. In recent years, U.S. think tanks specializing in international relations have increasingly adopted the concept of “economic security.” This shift provides a rationale for the U.S. government to justify prolonged trade friction. But does economic security truly provide a sound theoretical basis for sustaining trade disputes? This is a critical question that scholars from China, the U.S., and other countries must examine with serious academic rigor. Sanctions: Business Opportunities and Challenges Under Targeted StrikesWhether multilateral or bilateral, sanctions often lack clear international rules, and some existing regulations have little real binding power. In the international context, sanctions imposed on dual-use items are considered justifiable. However, the distinction between military and civilian applications is becoming increasingly blurred. What qualifies as a weapon? What constitutes civilian use? The applicable definitions are extremely broad. Historically, regulatory frameworks have mainly focused on weapons of mass destruction (WMDs) and did not extend to small conventional arms such as firearms and ammunition. Beyond the illegal circulation of military goods, sanctioning parties aim to maximize impact on the target while minimizing harm to themselves. This has led to the concept of “targeted sanctions”, which are imposed on specific countries, enterprises, or individuals. The effectiveness of sanctions depends on both the standards adopted by the initiating party and the target’s ability to respond. The instinctive response of sanctioned entities is to find substitutes for restricted goods, with domestic production being the most effective and ideal solution. Historically, however, countries participating in multilateral sanctions have discovered that they are also competing for market opportunities with the sanctioned party. When alternative technologies emerge in the global market, or when sanctioned items undergo a military-to-civilian transition within their jurisdictions, strict adherence to sanctions may not serve their own interests. Thus, the evolution of sanctions is often not rigid or absolute. Even so, the “when one door closes, another opens” effect is limited. Sanctioned entities still face structural challenges in expanding and stabilizing international market demand. Therefore, turning sanctions into opportunities requires the establishment of an open, trustworthy ecosystem for trade in goods and technologies, reassuring foreign clients. A particularly significant and complex issue in China-U.S. tech relations is the U.S. “small yard, high fence” strategy. Although the revised China-U.S. Science and Technology Cooperation Framework Agreement was renewed at the end of 2024, it is important to note that the “big yard, no fence” approach has emerged in U.S. competitive thinking. Currently, there is a growing U.S. inclination to include biopharmaceutical technology in its sanctions against China. The concept of biopharmaceuticals is broad, covering multiple fields that involve not only industrial competition but also fundamental human rights in public health. In reality, the “small yard, high fence” strategy has already affected China’s procurement of synthetic drugs and biochemical research equipment. Addressing these challenges requires a discussion on the dual-use nature of biotechnology, involving businesses, scholars, and government officials. Questions arise: Does dual-use technology truly exist in biotechnology? Under what conditions does biotechnology qualify as dual-use? If businesses passively wait for government directives, they risk falling into stagnation. Establishing a fact-based mechanism for China-U.S. and broader international dialogue is crucial. U.S. policy adjustments regarding e-commerce parcels originating from China mainly focus on two areas: 1. De minimis threshold reductions – There is a clear trend toward lowering the current $800 de minimis threshold, with multiple legislative proposals already in place. 2. Regulating illegal or prohibited goods – Concerns revolve around who is responsible for inspecting small parcels containing banned substances such as fentanyl and other narcotics. These concerns are legitimate from the U.S. perspective. Therefore, Chinese export regulatory agencies, particularly e-commerce firms, should take a more proactive stance in cooperating with the U.S. to improve the effectiveness of small parcel regulation. Cross-border e-commerce involves challenges for both sides, and China faces similar issues in its own regulatory environment. Liquefied Natural Gas (LNG): A Key Factor in U.S.-China Trade Balance?Over the past three decades, trade balance has remained a core issue in China-U.S. relations. Many hope that one day, a balanced trade relationship will ease political pressures on both sides. However, to achieve this, we must consider: Which U.S. products are essential for China, leaving no choice but to import them? Which imports from the U.S. will not disrupt China’s domestic industries? Reaching a consensus at both the domestic and bilateral levels is not easy. For instance, China’s efforts to develop its own large aircraft industry mean that massive imports of Boeing aircraft may not be the optimal choice. Recently, LNG has become a hot topic in China-U.S. trade discussions, while attention to agricultural imports has declined. This shift is driven by factors such as: • U.S. agricultural products already having stable markets, as some corn is incentivized for bioethanol production rather than food supply. • China diversifying its agricultural import sources and an aging population reducing food demand. Despite ongoing trade tensions, Chinese firms imported 3.9 million tons of LNG from the U.S. in the first ten months of 2024, marking a 63% year-on-year increase and a significant market share. Additionally, Chinese companies have signed contracts to import 14 million tons of LNG from the U.S. starting in 2026. However, China’s LNG import strategy is not solely U.S.-focused. • LNG imports often involve long-term contracts, making it impractical to break existing agreements to favor U.S. suppliers. • China’s land-based pipeline infrastructure cannot be easily repurposed to accommodate new LNG sources. • U.S. LNG exports are part of the global energy market, with strong demand in Europe and other regions. Meanwhile, China’s crude oil imports from the U.S. fell by 46% in 2024, as overall crude oil imports declined by 7.2%. This trend reflects structural changes such as: • An aging population reducing fuel consumption. • Expanding public transportation and high-speed rail infrastructure. • The rise of electric vehicles (EVs), which rely on hydropower, coal, nuclear, and wind energy rather than fossil fuels. Fossil fuel trade between China and the U.S. must also consider climate change politics. While a potential Trump 2.0 administration may be skeptical of climate policies, U.S. environmental movements remain steadfast. Historically, environmental opposition has blocked U.S. coal exports to China by preventing the construction of dedicated export terminals. Similarly, LNG remains a fossil fuel. Critics argue that exporting LNG merely shifts pollution from the U.S. to China, undermining global green development goals. Although climate change is often framed as a government-to-government emissions reduction issue, in the case of specific energy products, it is a tangible challenge that cannot be ignored. Moreover, U.S. domestic energy politics complicate LNG trade. Licensing gas field production involves complex state-level approvals. Middlemen facilitating China-U.S. LNG trade must secure agreements with both Chinese buyers and individual U.S. producers, who, in turn, require state government permits. Since China and the U.S. lack a free trade agreement (FTA), every LNG deal must be negotiated case by case, introducing uncertainty. Overall, LNG can play a role in balancing U.S.-China trade, but patience is required on both sides. Chinese Companies Manufacturing in the U.S.Setting up manufacturing in the U.S. is a competitive option for Chinese firms. EVs (electric vehicles) are an area of strength for China. The Biden administration’s 100% tariff on Chinese EVs applies only to finished vehicles. Whether a Trump 2.0 administration will modify this policy remains to be seen. Two key developments in the automotive industry deserve attention: 1. First, the non-joint venture, non-equity technology cooperation project between CATL and Ford. Despite facing significant criticism within the United States, with seven or eight U.S. congressmen even traveling to Michigan in an attempt to halt the project, it was restarted after several months of adjustments. The core reason for the successful collaboration between CATL and Ford lies in the lower cost of CATL’s lithium iron phosphate (LFP) batteries compared to Ford’s in-house produced lithium or nickel-cobalt batteries. At the same time, CATL is not solely reliant on Ford as a partner; it has other collaboration options, such as its ongoing plans to partner with Stellantis, which has been considering building factories in Italy or Eastern Europe. 2. BYD’s contract with Los Angeles Department of Transportation (LADOT) – If executed, this contract could pave the way for Chinese manufacturing in the U.S. For Chinese firms investing abroad, job creation is paramount. Ultimately, businesses should focus not only on geopolitics but also on economic fundamentals, market potential, and risk assessment. Transnational production stability is now more critical than traditional supply chain concerns. Expanding Globally: Job Creation as the Ultimate StrategyReturning to the question raised by entrepreneurs at the beginning—when selecting international markets, businesses should not base decisions solely on the “friendliness” of intergovernmental relations. Similarly, companies should not automatically avoid countries just because they are U.S. allies. It is essential to recognize that third-party countries between China and the U.S. typically adopt a flexible approach to shifting global dynamics. For them, there is rarely a binary choice between China and the U.S., as economic development and job creation remain their top priorities. Therefore, when planning market expansion, businesses should not make decisions purely based on geopolitical considerations. I have been asked before whether a foreign minister’s visit to China indicates a new market entry opportunity. In reality, a foreign minister’s visit has no direct correlation with whether investing in that country is a good choice. What truly matters is assessing the market’s potential and risks. Globally, economic engagement is shifting toward horizontal integration rather than vertical integration. • Horizontal integration emphasizes business partnerships based on complementary capabilities, fostering more balanced and equitable economic cooperation, rather than a simple “I produce, you buy” or a raw material–finished product exchange model. • Even in resource-based industries, governments and societies are increasingly focused on enhancing value-added production. Thus, the key to international economic engagement is how much added value Chinese enterprises can offer their partners. For most countries, domestic job creation is more critical than importing low-cost products. If Chinese enterprises can generate employment opportunities in foreign markets—including the U.S.—they will be more welcomed, just as foreign investments have been in China. Despite the economic strength of both China and the U.S., middle- and low-income countries also possess production capacity and competitiveness. • Technological diffusion is a global phenomenon. • Many middle- and low-income countries, even if they choose not to collaborate with China, can still develop by leveraging aid and investment from other countries to stimulate domestic job creation. Therefore, investment decisions should not be based on whether a foreign minister has visited China. Instead, they should be made through rigorous due diligence, including on-the-ground assessments. >From an international political perspective, Chinese enterprises expanding abroad should prioritize the transnational stability of production networks rather than focusing solely on traditional supply chains or value chains. Enhancing the precision of due diligence and ensuring flexibility in execution is essential. Companies must strengthen their capacity to navigate political risks at various levels to adapt to an evolving global landscape. |