January 31, 2018

By Sourabh Gupta and Nong Hong

Executive Summary

The inauguration of Donald Trump as the 45th president of the United States ensured that 2017 was an eventful year for U.S.-China relations. Two key issues were the locus of tensions in the relationship – the crisis on the Korean Peninsula and bilateral trade, economic and investment frictions. These issues will remain at the heart of U.S.-China relations in 2018.

Over the past year, Chinese President Xi Jinping and Donald Trump were able to contain these tensions and strengthen the bilateral ties between their two countries. But this trend is unlikely to continue in 2018. Tensions will spike as both sides begin to reach the limits of their cooperation on the crisis on the Korean Peninsula. China will only go so far in tightening the sanctions noose around North Korea for fear of causing regime collapse. That is a clear red line that Beijing will not cross. For its part, the United States is hampered by its insistence on pursuing the short-term policy goal of denying Pyongyang the assured capability to strike the continental United States with a nuclear-tipped missile. It is becoming increasingly clear that this goal is unattainable.

Looking into 2018, the status quo of the South China Sea will remain stable. Important steps were taken towards laying the groundwork for managing these disputes in 2016 and 2017, but any new progress will likely be slow and reflect changes to the rules of the game that have already been made. The South China Sea issue has taken a backseat to other more immediate concerns, such as the crisis on the Korean Peninsula. However, the fact that the issue has declined in prominence does not mean that the South China Sea is going away. In the coming year, the geopolitical competition between China and the United States will increase and will continue to set the stage for, and influence the disputes in the South China Sea.

On the trade and investment front, the Trump administration seems determined to force a showdown over the size of the bilateral trade deficit and the alleged non-reciprocal market access policies of China. With a large bilateral trade deficit and little progress within the U.S.-China Comprehensive Economic Dialogue (CED) process, President Trump is expected to pivot away from his centrist advisors on China trade policy and embrace the economic nationalist recommendations of U.S. Trade Representative (USTR) Robert Lighthizer, which align closely with his own views. Such a shift in policy, paired with punitive actions such as imposing tariffs and other forms of penalties on Chinese economic activities with the United States, could spark a trade war between the two largest economies in the world.

 

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