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Economy

Uncertain Progression of China-US Trade Talks Reflective of Trump’s Convoluted China Strategy

Mar 01 , 2019

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US Trade Representative Robert Lighthizer, one of the chief US negotiators.

After weeks of negotiation between Chinese and American diplomats and trade officials, President Trump announced a delay in the tariff increase on $200 billion of Chinese imports to the United States, initially scheduled for the beginning of March.

While the US president claimed via Twitter that a deal is close at hand, it is still far too early to say with any certainty if one will be reached within a few weeks’ time, or what it may look like. On Sunday, President Trump boasted that the “U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues.”

China has not publicly confirmed these details. While President Trump hopes to sign a deal in March with Chinese President Xi Jinping at his Mar-a-Lago resort, it is difficult to foresee that coming to fruition. Yet more unclear is whether the US can entice China to concede to any of the Trump Administration’s key demands. Perhaps the biggest challenge to accomplishing a deal is agreeing to the enforcement mechanism of any potential agreement, when the US wants to play both judge and jury.

The US wants China to fundamentally restructure its economy as the price for the US ceasing tariffs and other barriers to Chinese goods. Among the Trump Administration’s many demands: a halt to the forced coercion of technology or intellectual property by Chinese authorities, a dramatic reduction in government subsidies to state-owned enterprises (SOE), and an end to currency manipulation which has historically kept the RMB artificially low.

According to the reporting of The New York Times, the only concession to which the Chinese negotiation team has thus far agreed is to provide the United States with advance warning regarding any future currency adjustments. Regarding the other two key US demands, it is unlikely that the Chinese one-party state will be willing to concede so much internal political and economic control. Stopping the theft of foreign technology may risk China’s ability to keep up with developments in global IT. Halting the financial support of thousands of SOEs could mean surrendering political control over its economy, which is fundamental to the one-party state.

The core dilemma for China is whether it should acquiesce and fall in line with the established US-dominated trade norms or reject the demands, positioning itself in an even more adversarial stance to the West. If it does not conform with the demands, it risks seriously damaging its already faltering economy, on which the Chinese Communist Party has based its grand bargain with the Chinese people. (There are reports of academics calculating China’s 2018 GDP growth at 1.5%, rather than the official 6.5%.) As professor Minxin Pei articulated so eloquently in a recent article on China-US Focus, the trade war “is a manifestation of the escalating strategic competition between the two powers.” While the US-China trade war cannot be viewed as a singular, one-dimensional conflict, the effects thus far have been serious in that realm.

The United States has applied tariffs to just over $250 billion of Chinese products, while China has applied retaliatory tariffs on $110 billion worth of imports from the US. The American Chamber of Commerce and other business organizations, while agreeing with the Trump Administration’s demands of China, firmly oppose the tariff approach. The Chamber of Commerce has a point. A tariff war ultimately hurts US consumers who have to pay more for Chinese-made products, which reduces their buying power to purchase other goods. With China and the US’ economies representing 40% of global GDP, world markets are anxious to see if the trade war will end soon.

President Trump, while trying to assuage critics, has also shown his trademark impulsiveness and braggadocio. Last week, in an oval office press meeting with Chinese Vice Premier Liu He, Trump publicly clashed with his top US trade delegate, Robert Lighthizer, over the definition of a Memorandum of Understanding (MOU), leading the Chinese official to laugh at the discord between the two top US leaders in the negotiations.

Trump has repeatedly shown that sees himself as the ultimate deal-maker, and regardless of his less-than-comprehensive understanding of trade or macroeconomics, he will go forward confidently into the breach irrespective of his advisors’ advice and regardless of the potential fallout. This will not give confidence to investors, or to the Chinese negotiators who prefer reasoned, steady and predictable process.

The outcome of the talks withstanding, much damage has already been done to the nearly 40-year economic relationship between the two countries. The greatest impact of the trade war between the world’s two largest economies has been the swift paradigm shift from normal trade partners to economic adversaries. Both China and the US have already begun the process of long-term economic de-integration. The profound changes in the economic policy of the US and China towards one another will be very hard to reverse as both countries’ governments and businesses mobilize towards protectionism and pivot towards other markets.

An additional “X” factor, which cannot be understated, is that President Trump does not adhere to American principles of diplomatic negotiation, chiefly that of negotiating within one strategic sphere at a time. This has been a major point of criticism from his opponents. The Trump Administration has entangled trade negotiations with the extradition ofHuawei heiress Meng Wanzhou after President Trump suggested dropping criminal charges as a bargaining chip in the trade dispute. The Trump Administration is also heavily-dependent upon China in the coming weeks for positioning itself for a win inthis week’s denuclearization talks with North Korea’s Kim Jong Un in Vietnam. The trade negotiations simply cannot be understood without examining the other geopolitical pieces in play.

It remains to be seen whether the negotiations will be successfully resolved, whether they will take place in time for President Xi Jinping's rumored Mar-a-Lago visit, and most importantly who will gain the upper hand. Time will tell, but it is clear that the high-stakes drama will continue long after the negotiations conclude.

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