Another trade war, another stalemate?

World trade is already struggling with high shipping costs and shuttered Asian factories. That might not prevent another ramp up in Sino-American trade tensions.

It is a risky time to launch a trade war: Supply chains are snarled, shipping costs are through the roof and the Delta variant is ravaging economies. The world just might get one anyway.

On Thursday, China said it would formally apply to join the Comprehensive and Progressive Agreement for Transpacific Partnership—the successor to the Obama-era TPP free-trade agreement that currently excludes the U.S. and covers about 14% of the world economy.

That follows a Wall Street Journal report last week that the Biden administration is contemplating a new investigation into Chinese subsidies under section 301 of the Trade Act of 1974. That could result in new tariffs or a World Trade Organization case in concert with allies. The White House is also reviewing tariffs enacted by the last administration, some of which could be removed or modified.

Unilateral tariffs have proven ineffective in compelling China to make big changes to its subsidy policies, and the country’s performance during “phase one” of the 2019 Sino-U.S. agreement has been lackluster. As of July, China is on track to buy only around 70% of the U.S. goods agreed upon for 2021, according to data from the Peterson Institute for International Economics. More unilateral tariffs might not do much to help.

A big multilateral WTO case might be able to budge Beijing. But the Biden administration hasn’t done much to reassure traditional U.S. allies that it has their back. A surprise commitment from the U.S. to share nuclear submarine technology with Australia this week scuppered an existing Australian deal with France, and Europe more generally felt snubbed by the U.S. over Afghanistan. Ongoing wrangling over the WTO’s appellate-court system won’t make things easier.

If the U.S. does choose to go it alone again, Chinese retaliation is almost certain. Meanwhile, the prospect of the U.S. joining the CPTPP—seen by many analysts as one of the best ways to counter Chinese influence in Asia—still looks remote, given how toxic the politics of trade have become in Washington.

China’s bid to join CPTPP is likely to run aground too, given how quickly its relations with key members like Japan and Australia have deteriorated. The trade agreement’s safeguards against market-distorting behavior by state-owned enterprises have also arguably failed to keep up with changes in China’s state capitalist model.

The CPTPP has tough provisions prohibiting most subsidies for industrial SOEs. But it essentially defines an SOE as a company that is at least 50% owned by the government, or which the state has a demonstrable legal means of directly controlling, i.e. voting rights or control of the board. Many key state champions in China might no longer meet this criterion, despite being the beneficiary of very large explicit or implicit subsidies.

For example, around 70% of the shares in Semiconductor Manufacturing International Corp., the country’s leading chip maker, are free-floating, according to FactSet. Nonetheless, SMIC’s annual report shows it received government funding of at least $362 million in 2020. Widespread perceptions of state backing for such key firms—whether or not they are majority state-owned—also means that capital-market fundraising can be done at very low rates. Meanwhile, many large private-sector Chinese companies, now under increasing political pressure from Beijing, might find themselves making investments for noncommercial reasons and acting more like state-owned enterprises.

Given that the line between Chinese state and private firms is getting blurrier, rather than the other way around, CPTPP members with freer economies will likely be hesitant about allowing China in without a sea-change in the country’s economic policy or major changes to the agreement itself. This could be an opportunity for the U.S. to forge a more joined-up approach to dealing with its geopolitical rival, but instead the Biden administration seems tempted to reopen the Trump toolbox. Another mutually damaging bilateral trade fracas might be on the way.

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