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Economy

Can Washington and Beijing Turn a Lull into Lasting Peace?

Dec 04 , 2018

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Given the difficult circumstances, the outcome of the working dinner between Presidents Xi Jinping and Donald Trump in Argentina on December 1 was perhaps the best one could expect. On the positive side, the agreement between the two presidents provides a temporary pause – 90-days to be exact – in the U.S.-China trade war. Washington will not escalate further by raising the punitive tariffs on $200 billion of imports from China from the current 10% to 25%. In return, Beijing will immediately purchase a substantial amount of American goods.

To be sure, China threw a few sweeteners into this deal, both as a gesture of goodwill and, more importantly, as demonstration of its desire to end the trade war. They include imposing strict control on the export of Fentanyl, an opioid substance that has caused an epidemic of drug overdose in the U.S., promise of cooperation on de-nuclearizing the Korean peninsula, and likely approval of the Qualcomm-NXP merger (which was held up by Chinese regulators earlier this year).

Both sides were eager to portray the meeting between the two presidents at the G20 summit as a win. The impression one gets when reading the statement by the press secretary of the White House is that the Trump administration gave away nothing except a 90-day truce in the trade war while getting a list of Chinese concessions, in particular the purchase of American agricultural, energy, and industrial goods.

The official Chinese media’s coverage of the Xi-Trump meeting also cast China as the winner. Besides highlighting the suspension of the new tariffs, Xinhua’s report on the meeting stressed issues deemed important to China. For example, it stated that “The American side said that it would continue to adhere to the ‘One China policy’ and that President Trump ‘welcomes Chinese students to study in the U.S.’” (Notably, the statement by the White House did not mention these two issues.) At the same time, the Xinhua story omitted the most contentious aspects of the agreement: the 90-day deadline and the difficult trade issues that need to be resolved ahead, such as forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions, and cyber theft.

A dispassionate parsing of the competing spins coming out of Washington and Beijing will lead to only one conclusion. As the adverse economic consequences and their political implications are becoming clearer, Presidents Xi and Trump want to make one last effort to avert a full-blown trade war (which will almost certainly be followed by an accelerated breakdown of bilateral relations on nearly all fronts). At the same time, the harsh reality is that two sides are so far apart on substantive trade issues and, even more crucially, there is serious division in the Trump administration between pragmatists (who want to seek a realistic solution to bilateral trade disputes) and hardliners (who seek a quick and complete decoupling of the two economies). Under these circumstances, a short truce is the best one can hope for.

But kicking the can only a short distance down the road still means that Beijing and Washington will be faced with a moment of truth on March 1, 2019. The question is whether a comprehensive agreement can be reached by the deadline.

The honest answer is nobody knows. To be sure, based on the concessions China has made (President Xi actually paid for only a 60-day reprieve with a promised purchase of billions of dollars of American goods since Trump’s additional tariffs would not have been imposed before January 1), it seems that China is prepared to make even more concessions. However, Beijing will unlikely budge on issues it sees as vital to national sovereignty and regime security. For example, American demands that China end its efforts to scale up the technology chain and that Beijing cut off subsidies to state-owned enterprises will likely meet the greatest amount of resistance. Additionally, if one reads the original list of demands made by American negotiators in April, it included one draconian provision – that the U.S. retains unilateral rights to determine Chinese compliance and impose penalties should China be found in violation, while China must pledge not to retaliate in such an event. It is hard to imagine that the Chinese government will swallow this bitter pill.

But the issues deemed as nonnegotiable to Beijing will be the same ones the hardliners in the Trump administration will define as deal breakers. In the coming months, as American negotiators engage their Chinese counterparts and debate among themselves whether to end or escalate the trade war, Trump’s trade hardliners will easily find allies among national security hawks and critics of China’s human rights violations. The pragmatists will be arrayed against a powerful coalition that believes that the long-term strategic benefits of a fully-escalated trade war and ultimate U.S.-China economic decoupling far outweigh its short-term economic costs. Trump’s designation of Robert Lighthizer, the U.S. Trade Representative and a leading China hawk, as the chief negotiator with China in the coming three months also dims the chances of success of a deal.

This daunting reality should dampen our hopes for a quick end to the U.S.-China trade war when the 90-day period expires.

Only two factors can conceivably determine where the U.S. and China are headed in the coming three months. The first is obviously how much ground Beijing is willing to yield in order to avoid further escalations in the trade war and, subsequently, a likely U.S.-China cold war. It is fully within the realm of possibility that President Xi and his advisors decide that the Chinese government has greater capacity to absorb the shocks of unprecedented trade concessions now than the long-term economic and geopolitical costs of a Sino-American cold war.

The second factor is where President Trump comes down. Based on his protectionist instinct and consistent support for the hardliners in the trade war, Trump is more likely to side with them than the pragmatists if there is an impasse between the two camps. However, in recent months he apparently has become more aware of the economic consequences of a full-blown trade war. The turmoil in the financial markets and the looming threat of an American recession in 2020 – the year of his re-election – may persuade President Trump that a trade war is not so easy to win as he originally claimed. To avoid a recession that could endanger his chances for a second term, President Trump may want to pocket the concessions Beijing is willing to offer, end the trade war, and claim credit for striking the deal of the 21st century.

Whatever transpires by March 1, mercifully we don’t have to wait very long to find out.

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