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Economy

Where Are China-US Trade Relations Heading?

Feb 03 , 2020
  • Zhou Xiaoming

    Former Deputy Permanent Representative of China’s Mission to the UN Office in Geneva

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The phase one trade agreement between China and the United States, signed on Jan. 15, halted the trade war between the world’s largest economies and was touted by U.S. President Donald Trump as a “momentous” step and “an incredible breakthrough.” In China, it was viewed as a win-win for the two countries. Both Washington and Beijing sounded happy with the outcome of the talks, which plausibly promised a successful trade truce.

Indeed, the language of the agreement appears to be largely balanced. However, the reality is rather different. While the pact falls short of Washington’s original aspirations for the talks, as measured by the demands U.S. negotiators made to their Chinese counterparts during the first round of trade negotiations in May 2018, Washington, as the stronger party, extracted quite a few concessions. Most of the obligations under the agreement are, according to the Financial Times, “highly one-sided,” and fall on China.

Nevertheless, there is every reason to believe that Beijing will do what it can to live up to its commitments. It desired to work with the U.S. for better economic and trade relations, and it values the package that has taken nearly two years of grueling talks to conclude. Furthermore, it believes that the agreement, for all the pressure it would place on China to make necessary adjustments, is beneficial to its economic development in the long run.

But Beijing may eventually find that it has bitten off more than it can chew. Take the purchasing target, for example. The agreement calls for $161.2 billion in additional purchases of U.S. goods over two years, compared with 2017 levels. Not a few analysts doubt that the number is realistic. According to He Weiwen, senior fellow at the Chongyang Institute for Financial Studies in Beijing, China’s global imports of goods increased by only $117.7 billion over the past five years. The target is unlikely to be reached even if China cuts back on imports from elsewhere, which may put the country at odds with its other trading partners.

The reason is simple: The country is probably not capable of absorbing such a huge influx of goods in such a short period, despite the genuine and intensive efforts of the government. But China’s failure to meet the specified target would hand the Trump administration a handy excuse to reimpose tariffs on Chinese imports.

Already, there is no lack of suspicion about Trump actually honoring the agreed terms of the deal. His record of backtracking on international agreements since he took office has led many in China to believe that he may renege. However, he would do so only when he deems such a move to be politically expedient.

Violation of the trade deal would likely prove to be a political liability for Trump. It would not only sabotage the implementation of the phase one agreement, but also hinder the progress of subsequent talks. Consequently, much of what the U.S. gained from the trade talks would be lost as further damage from tariffs is inflicted on U.S. manufacturing and agriculture. Such a development is sure to alienate many voters, especially those in the Rust Belt region, jeopardizing Trump’s re-election chances.

For this reason, in all likelihood, he would suppress his impulse to take any punitive trade action even if he is unhappy with China’s compliance.

Additionally, with the breakthrough in the China trade talks, the Trump administration is training its targets across the Atlantic. At a time when the U.S. needs all available resources for engagement with the European Union, disruption of the preliminary truce in the U.S.-China trade war would be an unwelcome distraction.

It is evident, therefore, that neither China nor the U.S. has any incentive to scuttle the pact before the U.S. presidential election in November, so the world can expect relative peace on the trade front between the two countries for a while. However, the truce may be broken after the election, regardless who emerges as the occupant of the White House.

It is widely believed in China — and elsewhere in the world — that the result of the presidential election will not change America’s policy toward China in a significant way.

There is a bipartisan strategic consensus in Washington. In view of its determination to curtail the rise of China, it should come as no surprise to anyone if, soon after the dust of the election settles, the White House accuses China of failing to honor its commitments and restarts the trade war.

The enforcement mechanism in the agreement also makes it easy for Washington to impose punitive measures against China. It does away with the neutral adjudication mechanism found in most other trade agreements, notably those of the World Trade Organization. Instead, it provides that either side can decide on its own if the other side is in violation, and can take what it considers to be appropriate action without counter-response. This system, in effect, gives the Trump administration a free hand to reimpose the tariffs whenever it sees it fit.

What, then, are the prospects of a full resolution to the trade conflict?

In an effort to build on its success in the phase one negotiations, Washington is pushing for phase two talks to get off the ground shortly. China does not seem so anxious, though. It prefers to focus on the implementation of the phase one deal before bracing for stormy new sessions of trade talks.

Washington wants subsequent negotiations to address what was left over in phase one — issues such as the state’s role in China’s economy. It has time and again stated that it aims to secure a “structural change” in China’s economic system.

But if Washington insists on this objective, negotiations will soon reach a stalemate. China considers its economic system as one of its key strengths and fundamental to the current success and future prosperity of the country. It would be hard to expect it to compromise on this.

As in previous trade talks, the Trump administration intends to capitalize on tariffs. The phase one deal leaves in place punitive tariffs on approximately $370 billion of Chinese imports, pushing the average tariff level on Chinese goods to 20 percent, up from 3 percent before the trade war began two years ago.

Nevertheless, the Chinese economy has weathered the storm better than expected. It expanded by 6.1 percent in 2019, hitting the target the government set at the beginning of the year. More important, official data released in mid-January show marked economic improvements in the last month of 2019, with PMI in manufacturing and exports up by a big margin.

The dynamism and resilience of the Chinese economy has increased Beijing’s confidence about its ability to cope with a prolonged trade war, which would put a dent in the potency of tariffs as a weapon. While China seeks the removal all existing tariffs, those are becoming less useful as leverage for the U.S. If the Chinese economy continues to do well, a new period may be ushered in — one in which Beijing could hope to enjoy the initiative in trade talks. Such dynamics will render it more difficult for Washington to coerce Beijing into accepting its terms.

Apart from economic considerations, other factors may also come into play — security, for example. This will complicate the trade talks.

Given all these challenges, the road to trade peace is treacherous. Unless Washington softens its stance, it could be a long time before trade peace sees the light of day.

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