By: Benjamin Cooper and Philippe Healey

• In his speech, President Trump laid out an optimistic vision for the U.S. following the first year under his watch, declaring that the country has now arrived at a “new American moment.”
• His remarks were light on specific policy proposals, but some of the key future initiatives that he highlighted included an immigration reform package and US$1.5 trillion in spending to rejuvenate America’s “crumbling infrastructure.”
• While most of his speech was dedicated to domestic policy, Trump did briefly touch upon his positions regarding trade, again calling for fair and reciprocal relationships and declaring that, “The era of economic surrender is over.”
• The initial reactions of the U.S. business community to Trump’s speech appeared to be largely positive, particularly with regards to the tax cuts, deregulatory efforts, and the coming infrastructure drive. Silicon Valley, however, was likely troubled by the omission of any of the top policy priorities for tech industries.
• Although he made no major announcements on his China strategy as expected, Trump did fleetingly mention the country as being among “rivals” that challenge America’s interests, economy, and values, further confirming Washington’s pivot away from its longstanding policy of engagement towards one of greater strategic competition.
• Beijing has been displeased with Washington’s shift towards embedding great power rivalry at the core of its national strategy and again urged it to “abandon its Cold War mentality,” stressing that, “cooperation is the only right choice.”
• The Trump administration is widely expected to move ahead with a series of trade actions directed at China this year. Washington also looks set to intensify its scrutiny of Chinese investments in the U.S., particularly in tech industries.
• China’s potential avenues for retaliating against the U.S. include filing complaints with the WTO, targeting U.S. export industries and companies with significant Chinese interests, and offloading some of its U.S. Treasuries.
• The stage looks set for tenser economic relations between China and the U.S., but it remains unlikely that either side will allow even their most contentious trade and investment issues to dramatically upend an economic union in which both have so much invested. 2018 will probably be defined by light trade skirmishes rather than a full-blown brawl.

On January 30^th, President Trump ascended the dais in the U.S. Capitol Building and delivered his maiden State of the Union address to a joint session of Congress. For U.S. presidents, the annual speech usually represents their highest-profile and most powerful platform on the American political calendar, providing them with the opportunity to both tout their achievements in office as well as outline the future agenda for their administrations.

Casting out the “American carnage” for a “new American moment”
In his 80-minute speech, one of the longest State of the Union addresses in U.S. history, Trump laid out an optimistic vision for the country following the first year under his watch, calling for national unity and declaring that the U.S. has now arrived at a “new American moment.” As all presidents do, he took ownership for what his White House views as the major areas of progress in the preceding year, pointing to the resurgent U.S. economy, record-high stock markets, low unemployment, the overhaul of the tax code, ongoing deregulation efforts, and more. His speech was fairly light on specific policy proposals, but some of the key future initiatives that he highlighted included an immigration reform package set to go through Congress and US$1.5 trillion in spending to rejuvenate the country’s “crumbling infrastructure.” Overall, the upbeat tone of his remarks struck a sharp contrast with the bleak, near dystopian picture of “American carnage” that he controversially painted in his inauguration address last January.

Pulling down the flag of “economic surrender”
The lion’s share of Trump’s speech may have been dedicated to domestic policy, but he did briefly touch upon his positions regarding trade, again calling for fair and reciprocal relationships and declaring that, “The era of economic surrender is over.” He went on to emphasize that, “We will work to fix bad trade deals and negotiate new ones. And we will protect American workers and American intellectual property, through strong enforcement of our trade rules.” However, he had little to say about his track record on trade or specific measures that he intends to take in the future.

Both on the campaign trail and after assuming office, the president has been hugely vocal about the urgency of reconfiguring America’s trading arrangements with the rest of the world and putting a tourniquet on what he views as the hemorrhaging of U.S. economic interests due to other countries’ economic regimes and their accompanying trade policies. His uncharacteristic lack of volubility on the subject in his State of the Union address consequently took many by surprise, although he did reiterate his main points on one of his top priority issues, simply opting to stick with broad and rather vague rhetoric.

Taking the temperature of the U.S. business community
Business leaders typically pay close attention to the State of the Union addresses, looking for any indications about the future direction of policy. This year, the U.S. business community appeared to be largely positive about the major successes touted by Trump and his agenda, particularly with regards to the tax overhaul, deregulatory efforts, and the coming infrastructure drive. For example, the U.S. Chamber of Commerce praised the “pro-growth achievements” of the administration, while the National Association of Manufacturers declared that, “The president made 2017 the Year of the Manufacturer with his unrelenting focus on improving the lives of manufacturing workers,” going on to emphasize that U.S. manufacturers, “stand ready to work with leaders in Congress to advance a bold and ambitious agenda to rebuild our nation’s broken infrastructure.”[1] Trade associations representing the port authorities and the hotel industry similarly commended the administration’s commitment to investing in the country’s infrastructure.

However, the business community was not without its concerns. The American Alliance for Manufacturing (AAM) said that while it was pleased that, “the president touched on trade and manufacturing…rhetoric alone doesn’t translate into policy,” stressing that it was waiting for action on steel dumping.[2] In addition, the U.S. Chamber cautioned that, “the economic gains we’re seeing from regulatory relief and tax reform could be erased if we do not stand up for and protect free, fair, and reciprocal trade around the world.”[3] And the American Hotel and Lodging Association (AHLA) expressed its unease about the decline in global tourism to the U.S., urging the administration, “to send a welcoming message to the world and adopt policies that promote international travel to the U.S. while maintaining our security.”[4]

Furthermore, Silicon Valley was likely troubled by Trump’s omission of any of the top policy priorities for high-tech industries, including Internet access, cyber-security, and next-generation technologies such as artificial intelligence.[5] This lack of attention to America’s innovation engine marked a sharp departure from Trump’s predecessor, President Obama, who regularly unveiled major tech initiatives. However, the Information Technology Industry Council, which represents a number of U.S. tech behemoths, did note that, “We heard some positive statements from President Trump tonight,” emphasizing that with regards to his remarks on issues such as immigration and infrastructure, “Moving forward, the opportunity will be in the details.”[6]

Washington’s shift from engagement to competition with Beijing
Similar to his pruned-down rhetoric on trade in general, Trump was also unexpectedly reticent regarding his administration’s strategy on China, which he has often placed front-and-center in the White House’s criticisms about other countries’ trade and economic policies. He did, however, briefly mention China, alongside Russia, as being among the “rivals” that challenge American interests, values, and the economy. The reference further confirmed Washington’s ongoing major reevaluation of its relationship with Beijing and pivot away from its longstanding policy of engagement, which has formed the bedrock of bilateral ties for decades, towards one of greater strategic rivalry and competition. This was spelled out much more bluntly in the Trump administration’s new national security strategy (NSS) unveiled in December, a document which described the “return of great power competition” and explicitly accused China of engaging in alleged unfair trade and economic practices. The NSS was particularly notable for its direct alignment of economic affairs with national security for the U.S., stating, “Economic security is national security.”

China admonishes the U.S. for its “Cold War mentality”
The current administration’s moves towards embedding great power rivalry at the core of its national strategy has predictably alarmed and displeased Beijing. Following Trump’s address, China’s foreign ministry once more urged the U.S. to “abandon its Cold War mentality and outdated zero-sum game ideas” and emphasized that, “cooperation is the only right choice for China and the United States.”[7] Similarly, the commerce ministry cautioned the U.S. not to “politicize” economic and trade issues between the two countries, stressing that, “In the trade area, we tend to see the United States as our partner.”[8] State-run media also warned about the dangers of “malicious rivalry” and argued that the U.S. should work together with China to build “a new model of major-country relations, featuring non-conflict, non-confrontation, mutual respect, and win-win cooperation.”[9]

The state of the Sino-U.S. economic union in 2018

At the beginning of last year, fears abounded that the new U.S. administration would ignite a trade war with China – a trade war that ultimately never came to pass – but gradually subsided as the months went by and Trump refrained from pushing through any tough trade measures against China. The seemingly strong personal rapport established by Trump and President Xi at their first summit in Mar-a-Lago, Florida last April and later during what was billed by the Chinese media as Trump’s “state-visit plus” to China in November further quieted concerns about the prospect of trade tensions derailing ties between the world’s two largest economies.

However, the bears on bilateral relations have now emerged from their short-lived hibernation and begun clamoring again in recent months following the release of the NSS and the president’s first trade action targeting China in January, namely the tariffs on solar panels imported into the U.S., of which China is by far the largest supplier. Furthermore, the U.S. government is currently wrapping up major investigations into China’s alleged theft of American intellectual property – for which Trump has said that his administration is now considering whether or not to impose a “big fine” – and dumping of steel and aluminum into the U.S. market. The solar panel tariffs are widely believed to be Trump’s minor opening salvo in what could eventually emerge as a broad series of trade moves against China this year, although if so their severity remains to be seen.

Speculation is also rife that Chinese investment will contend with higher regulatory obstacles in the U.S. this year. In recent months, several high-profile Chinese acquisitions of U.S. companies, most recently Ant Financial’s planned US$1.2 billion purchase of U.S. money transfer company MoneyGram International in January, have collapsed after failing to secure a green-light from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency body tasked with reviewing foreign acquisitions of American entities. With the support of the White House, Congress is currently working on a bipartisan effort to further broaden the authority of CFIUS and the deals subject to its oversight. The U.S. government is particularly concerned about the future erosion of America’s economic competitiveness in high-tech industries given China’s rapid ascent as a new global leader in this space. In 2018, Chinese investors can expect to face an even steeper climb at CFIUS, especially those looking to buy advanced tech assets in the U.S.

Chinese avenues for retaliation against U.S. trade actions
If the Trump administration decides to move aggressively against China on the economic front this year, Beijing has a number of avenues that it could hit back through. For example, Beijing could choose to register its displeasure by filing complaints against any U.S. protectionist measures with the World Trade Organization (WTO). In addition, it would most likely leverage the size of its vast market to retaliate in kind against U.S. export industries with the largest China interests, such as American agriculture, aviation manufacturing, auto parts, and machinery, targeting in particular the most vulnerable industries within Trump’s support base. It could also follow through on previous threats to offload some of its U.S. Treasuries – China now owns more than US$1 trillion of U.S. debt – although other countries would probably buy it up.

Some were born to sing the blues?
Following the unexpected lull of 2017, the stage does look set for tenser economic relations between China and the U.S. this year. After concluding its’ trade-related reviews, the Trump administration will almost certainly enact punitive remedies directed at China as part of its bid to push Beijing into granting greater reciprocity in terms of market access and create a more level playing field for U.S. companies in China. Furthermore, there is bipartisan support for heightening oversight of Chinese investments in the U.S. and tightening the scope of what is restricted. The degree of Beijing’s response to these steps will probably be carefully calibrated to match the degree of Washington’s moves.

However, it remains highly unlikely that either the U.S. or China will allow even their most contentious trade and investment issues to dramatically upend an economic relationship in which both sides have so much invested. Despite the drum of trade-war fears that have started beating once again, cool heads on both sides of the Pacific can be expected to prevail, and, in all probability, 2018 will be defined by modest skirmishes rather than a full-blown brawl.

That said, companies should still plan on weatherproofing their corporate strategies wherever possible to guard against any Sino-U.S. trade storms that could batter the global economy this year.

[1] “Reactions to Trump’s State of the Union address,” Industry Week, 31 January 2018.
[2] Ibid.
[3] Ibid.
[4] “AHLA’s President and CEO, Katherine Lugar, releases statement on President Donald Trump’s State of the Union,” Hotel-Online, 31 January 2018.
[5] Tony Romm, “Trump didn’t say much about tech in his first-ever State of the Union address,” Recode, 30 January 2018.
[6] Ibid.
[7] Wang Qingyun, Liu Xuan, and Chen Weihua, “Trump is urged to drop confrontation,” China Daily, 01 February 2018.
[8] “China urges U.S. not to ‘politicize’ trade issues,” Xinhua News Agency, 01 February 2018.
[9] Curtis Stone, “Op-ed: America under Trump should seek strength through cooperation and not competition,” People’s Daily Online, 31 January 2018.