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Economy

Suspending the Trade War: Trump Made the Right Decision

Oct 30 , 2019
  • Su Jingxiang

    Fellow, China Institutes for Contemporary International Relations

In their 13th round of trade negotiations, China and the U.S. reached a phase one trade deal. According to President Donald Trump at a White House briefing on Oct. 11, two points of agreement are critical: the U.S. will cancel the planned increase of tariffs from 25 to 30 percent, and China will purchase American agricultural products valued at $40 to $50 billion.

The two sides also agreed that their trade negotiators would further consult each other and put the specifics of the agreement in writing for the leaders to sign formally during the APEC summit in Chile, which is set for Nov. 16 and 17. Various signs indicate that cooperation has been going smoothly. The 18-month trade war has been markedly relaxed.

The trade war started in August 2017, when the U.S. Trade Representative’s office published a preliminary report suggesting that the Made in China 2025 program could put China ahead of the U.S. in such fields of next-generation technologies as wireless 5G networks, artificial intelligence and cybersecurity.

A second report, which followed in March last year, summed up and validated the contents of the first — that China’s technological development plan for the coming decade poses a fundamental challenge to America’s global and economic hegemony. President Trump then signed an administrative memo imposing further tariffs on Chinese commodities worth $50 billion, thus firing the first shot in the trade war.

Trade negotiators from the two countries had reached a provisional agreement in May last year, but Trump rejected it. According to some American media, China at that time agreed to increase its purchase of American agricultural products, which didn’t move the U.S. since that was not its real objective. It intended to use trade to force China to make fundamental concessions in intellectual property rights protections, technology transfers, subsidies and industrial policies, thus dragging down the latter’s high-tech industries.

In the multiple rounds of negotiations since then, the U.S. had increased its demands in attempts to force China to accept terms of surrender. Even before the 13th round, President Trump had stressed that he would only accept a comprehensive big deal instead of a partial agreement. Ultimately he accepted the Chinese proposal, which China had already agreed to in May last year.

Trump probably changed his approach for a number of reasons. First, the domestic political situation had been rather perilous. Democrats in Congress had been collecting evidence for impeachment. Trump needed to suspend the trade war with China and deal with the Democratic Party with greater concentration.

Further, the agricultural sector had become increasingly dissatisfied with Trump’s policy. At least 12,000 farms went bankrupt in 2018 because of the trade war, and probably many have followed suit this year. The Trump administration provided $28 billion in agricultural subsidies, but that went mainly to large agribusinesses, not the small farmers who needed it most. American farmers realized that they might forever lose their largest overseas market China and thus demanded that Trump should resolve the trade dispute as soon as possible.

More important, many ominous signs had appeared in the U.S. economy. Freight volume, including trucks, railways, aviation and barges — an important indicator of economic reality — dropped for the eighth consecutive month in July 2019 by 5.9 percent from the same period of the previous year, with the trucking industry in especially bad shape. In June this year, spot freight volume by trucks decreased by more than 50 percent year-on-year, with revenues down by 18.5 percent. About 640 hauling companies went bankrupt in the first half of this year because of poor business management and major freight fare declines, triple that of a year earlier.

Bonds issued by Ford Motor Co. were downgraded by Moody’s from BBB to junk on Sept. 25, shocking U.S. financial circles. At present, bonds rated as BBB account for 50 percent of all corporate bonds in the U.S., while the figure was just 33 percent at the start of the 2008 financial crisis. In other words, if the economic situation worsens, as much as $3 trillion in corporate bonds may be downgraded to junk, versus the $800 billion 10 years ago. Many economists predict that continued worsening of the economic situation may well trigger a major financial crisis before the 2020 presidential election.

Donald Trump’s decision to suspend the trade war with China was a wise one. If the decision helps reverse the economic situation, it may well contribute to his campaign for re-election.

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