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Foreign Policy

Factors Behind the Prospect of China-US Trade Deal

Aug 23 , 2019
  • An Gang

    Research Fellow, Center for International Strategy and Security, Tsinghua University

US China trade.jpg

Since the trade talks between the United States and China collapsed in May, the prospects for a deal has greatly dimmed. Even if there is still hope, it has become unlikely to reach a deal any time soon. The 12th round of China-US high-level trade negotiation held in Shanghai at the end of July seemed to be an attempt at picking up pieces of the draft deal.

However, even though the negotiators covered most of the issues already agreed upon, they could not resolve the parts concerning principles and structures. To achieve a breakthrough in these absolute matters requires their submission to higher-ranking authorities again for political decision-making.

On August 1, 2019, President Trump defied his advisors to announce an additional 10% tariff on $300 billion worth of Chinese imports, effective September 1, exacerbating the tension. The pressure from the US side has continued to spread beyond trade itself. Not only did the U.S. refuse to honor Trump’s commitment to a relaxation on the sales restrictions to Huawei, but it also added the China General Nuclear Power Group (CGN), a Chinese nuclear power corporation, to its Entity List.

Hardly can Beijing make a concession to review and revise laws and regulations and to establish and implement a verification mechanism, as demanded by the U.S. Beijing sees the demands as crossing the bottom lines of Chinese policies and hurting its core interests. Washington can hardly agree to remove all the tariffs imposed since the trade tensions began even the White House has indicated that President Trump’s August 1 decision can be reconsidered. The consensus within the Chinese government seems to be that China is no longer in a rush to secure a deal, so it can fight against and talk to the US at the same time or at intervals, and even make use of the competition in exchange for cooperation. On the contrary, the Trump administration saw an increasingly urgent need to strike a deal with China, because for one thing, with the implementation of additional $250 billion tariffs of, Trump is running out of bargaining chips. The longer the negotiations last, the greater the pressure from soaring retail prices of US commodities. More companies, farmers and individual consumers would come out against Trump’s tariffs war.

Eight to nine months later, the Republicans and Democrats will vote for their presidential and vice-presidential nominees. It is still early for Trump to officially launch his re-election campaign, but his calculation will undoubtedly relate more to how the trade tensions with China will be handled. On August 14, the Trump administration announced that it would delay the imposed tariff on Chinese laptop computers, video game consoles, toys, monitors and certain footwear products and clothes until December 15, 2019. “Just in case they might have an impact on people” in shopping seasons like Thanksgiving and Christmas, the president told reporters. Of course, even like this, around 37%, or US $110 billion worth of Chinese products will still be hit with the 10% tariff starting September 1, 2019.

Recently, there have been signs of optimism on China-US trade talks. On August 1, Chinese State Councilor and Foreign Minister Wang Yi, met with US Secretary of State Mike Pompeo in Bangkok. On August 13, Yang Jiechi, Member of the Political Bureau of the CPC Central Committee and Director of the Office of the Central Commission for Foreign Affairs met with Pompeo in New York. These events suggest that amidst massive public pessimism, both sides have exercised restraints, stuck to bottom lines and left door open for negotiation and coordination. The trade negotiations have also witnessed subtle changes that see more diplomatic guidance complementing increased professionalism, signaling a possible political solution to the deadlock.

It is safe to say that after a year of wrestling, the US and China have almost tied the game. China has encountered severe challenges including slower economic growth, investment outflow, stagnant independent R&D and soaring inflation. Nevertheless, the Chinese government has also realized that the economy is more or less resilient thanks to the enormous domestic market and emerging markets along the Belt & Road route Moreover, it has won stronger public support and consolidated consensus at home. Meanwhile, the US has increased fiscal revenues by imposing tariffs and avoided the immediate impacts of tariff wars on the livelihood of the American people temporarily. However, it also realized that “extreme pressure” cannot deter or defeat China, On the contrary, the tactic encourages China to pursue indigenous development to become more competitive.

In the tech sector, the US ban on Huawei and ZTE exposed many problems China faces in basic R&D, industrial allocation and other areas. On the other hand, it gave birth to an “electronic nationalism” among Chinese consumers and fueled the sales numbers of the two companies. Meanwhile, Huawei continued to grow its overseas business, and most countries in the world try to avoid taking sides in products made in America or China.

The US and China have reached a deadlock in a tug of war in trade and tech. In China, mainstream consensus has been that the trade friction is the new normal in a Great Game between the two powers. The game is on, where the White House competes for global dominance and hegemony, while Beijing for the rights of development and its national rejuvenation, with trade disputes taking on more significance. Therefore, some people believe it is justifiable and necessary to continue fighting the trade war.

At present, leaders of both sides face the choices of either achieving a trade ceasefire or adding fuel to the fire. Do they really need a trade deal? Some Chinese scholars believe that, as Beijing switches its defensive position to an offensive play in trade negotiations, it is the Chinese government that has the upper hand whereas the Trump administration is more eager to reach a deal, because the latter needs to demonstrate competence to the US voters. For a deal, the White House must show sincerity. However, the Trump administration has moved to approve arms sales to Taiwan and take other actions that provoked China further, offering proof opposite of sincerity but too much ambiguity for China to judge upon.

From now on, the factors at play in China-US trade talks will surface beyond economic laws to changes of a series of cross-section variables. Among the variables, “three and a half factors” are the most important.

The first factor is the domestic economic climates of China and the US. China’s economic performance in Q1, though better than expected in Q1, fell short. According to macroeconomic statistics released in June, China has witnessed a shrinking manufacturing, higher financial market volatility, sluggish export output and increasingly slower investment. On the whole, the downward pressure remains high. As time goes by, the additional US tariff will further affect China’s economic growth prospect. The US economy, on the other hand, has registered a continuous growth for over 120 consecutive months, marking the longest economic expansion in American history. However, the fear of a recession emerged. More indicators of a recession have thrown the market into rising panic. The US Treasury yield curve appears to be inverted, a prelude to recessions that would occur sometimes in several months and in some cases a few years. Under such circumstances, Trump and his economic team need to come up with more stimulus measures, making it the top priority to fight against the Fed, rather than wield a big stick towards China.

The second factor is the domestic agendas. In the autumn of 2019, the Chinese government will concentrate on making sure the celebration of the 70th anniversary of the founding of the PRC is a success In the United States, which is a predominantly election mood, the Democratic Party will be poised to launch preemptive attacks against the Trump scamp. At that time, any emergent occurrence in the US territory could divert Trump’s attention at any time. Such a critical moment for both countries’ domestic events has left little room and time for yielding mutual compromise on economic issues. Any possible changes in the next six months will further narrow the choices of each other.

The third factor relate to issues concerning Hong Kong and Taiwan. In the recent turmoil in Hong Kong, China unequivocally accused the U.S. government of acting as “the black hand” behind the scenes. The Chinese government has rejected the request for port visit to Hong Kong by two US warships. That being said, Trump still showed prudence in public, insisting that the Hong Kong issue is an internal affair of China and described Hong Kong protests as “riots”. However, the unfolding events in Hong Kong still risk derailing the China-US relations. Another issue concerning China’s sovereignty and national feeling is the Taiwan issue. For her to win a second term, Tsai Ing-wen is stepping up her efforts to play the card of Independence-Unification issue in Taiwan. In the coming few months, the Tsai administration is most likely to make reckless moves, and the US may respond with support out of strategic and political needs. While this article is being written, it is reported that it is almost a certainty that the US would sell F-16V fighters to Taiwan for US$ 8 billion after long preparation (which has been approved by Trump). If the Pentagon finalizes the move by notifying Congress of the sale, it will definitely be horrible news for the trade negotiations between China and the U.S.

The “half factor” is the nuclear issue on the Korean peninsula. The North Korea nuclear issue also has a bearing on China-US relations. During the first half of Trump’s term, his administration has alternated its focus between the trade disputes with China and the North Korea nuclear issue on its Asia-Pacific agenda. Trump intended to link the two issues to put pressure on China. At the G20 Osaka Summit in June this year, Beijing’s contribution to the meeting between Trump and Kim Jong-un in Panmunjom was one of the reasons why Washington pledged to suspend additional tariffs on Chinese goods. At present, US and North Korea are engaging each other secretly and negotiating a plan of partial lifting of the sanctions in exchange for partial denuclearization, but DPRK has obviously strengthened its missile research and development programs again. Indeed, Trump hopes to publicize his “effective” handling of the North Korea nuclear issue as a political achievement for re-election. However, at the very moment of the 2020 US election, whether North Korea will present the US with a “generous gift” or sabotage by taking some military actions remains a question mark that involves a play of the U.S. DPRK, and China.

From September to next summer, China and the US will be entering a critical final lap when they should seize the opportunity of milestone events such as the APEC Economic Leaders’ Meeting to schedule or push forward the negotiations, for in the run-up to the US presidential election will hardly leave any room for trade talks. The election of the next US president will usher in a new chapter for the China-US relations. Deal or No Deal may no longer matter. In the long term, China needs to take into account different scenarios after the 2020 US election while continuing its trade talks with the US. There will be four scenarios: what if the two countries fail to reach a trade agreement and Trump gets re-elected; what if trade agreement is reached but Trump not re-elected; what if a trade agreement fails and Trump not re-elected; and what if the trade agreement is reached and Trump re-elected. The truth behind these scenarios is whether the two powers will find a deteriorating relations ultimately leading to full-scale confrontations or they will work together to restore the relationship to strike a new balance.

The landscape is changing rapidly. The views of the leaders, professional negotiating teams and of the businesses and the public opinion are constantly shifting. The jury is still out. Facing perhaps the last opportunity, all should recognize that China-US trade negotiations have far gone beyond professional negotiations to involve political and strategic issues. Long gone are the days when trade was just trade. Therefore, while holding our breaths for a deal, all parties also need to prepare for the opposite result.

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