16 May 2019
The world breathed a sigh of relief and markets resumed their upward trajectory after US President Donald Trump and his Chinese counterpart Xi Jinping agreed, on the margins of the G20 meeting in Osaka, to unfreeze stalled trade talks.
However, it is one thing to resume discussions on a bewildering range of contentious trade issues; it is another to conclude an agreement that would satisfy divergent Chinese and American requirements.
“The Chinese will not accept an arrangement in which it is made to appear it lost ground to satisfy Trump’s domestic political needs."
Trump’s statement, on his return to the White House from his meeting in the Demilitarised Zone on the Korean Peninsula with North Korea’s Kim Jong-un, that Washington and Beijing “have a good chance of making a deal” should be regarded skeptically.
China would not have been impressed with Trump’s observation in the same press conference that a deal could not be “50-50 “. It needed to be, he said, “somewhat tilted to our advantage”.
Beijing will have long since conditioned itself to accepting that what Trump says and what actually transpires are often at odds. That said, the Chinese will not accept an arrangement in which it is made to appear it lost ground to satisfy Trump’s domestic political needs.
US negotiators should’ve got this message by now.
Washington’s sore point
Statements accompanying the decision to resume trade talks included the words “mutual respect”. This is Chinese official language for a mutually beneficial deal.
What transpired in Osaka was a temporary ceasefire in trade hostilities rather than a truce.
Officials will now go back to the negotiating table to deal with extraordinarily complex issues relating to market access, forced technology transfer, currency manipulation, intellectual property theft and what Washington perceives to be a slew of non-tariff barriers impeding American investment in China.
There is also the overarching issue of China’s status as a developing country under World Trade Organisation rules. This entitles Chinese businesses to preferential treatment compared with their developed world competitors.
The WTO status is a sore point with Washington - and with other developed countries like Australia for that matter.
Practically speaking, what Trump has conceded is a delay in the imposition of new tariffs on $US300 billion of Chinese imports. This represents virtually the balance of China’s exports to the US beyond the $US250 billion worth of items on which Trump has imposed tariffs of between 10-25 per cent over the past year.
This whole saga has been a slow-moving trade wreck. It is one that has unnerved global markets and put at risk global growth.
Concerns about slowing economic activity will have been a factor in the US decision to resume trade negotiations. Pressures from US allies and international institutions like the International Monetary Fund, anxious about a protracted trade standoff, will have filtered through to the White House.
On the other hand, no one should be under any illusion about the complexities of a deal that would satisfy both sides. A complication for Trump is that an American presidential election year is looming.
An incumbent president seeking to persuade voters he has been diligent in protecting American jobs will not wish to be seen to be giving ground to China. Trump’s 2016 campaign pitch to the rust-belt states of the mid-West involved pledges to restore employment opportunity.
Criticism of “bad” trade deals like NAFTA with Canada and Mexico and Chinese exploitation of market opportunities in the US were integral to his campaigning rhetoric.
Democratic contenders are already seeking to outflank Trump on trade issues in an environment in which populist politics, antipathetic to free trade, is part of the American political landscape.
Ryan Hass of Brookings in an essay US-China Trade, America is off track made some acute observations about the negative consequences for the US from the politicisation of trade during the election campaign.
“By politicising China to the extent he did during his campaign and since, Trump set the stage for such an unfavorable outcome,” Hass argued. “He made bold pledges to ‘fix the trade deficit’ and reform China’s economic structure, all at little cost to Americans. He famously declared that ‘trade wars are good, and easy to win’.
“Such promises were politically potent but economically illiterate. By overpromising outcomes from the start, he eliminated space for give-and take-compromise and steady if imperfect progress toward greater China market access and economic reform. When trade negotiations between two global powers get reduced to all-or-nothing dynamics, the American people risk being left with nothing.”
Perhaps the most significant element of Trump’s trade ceasefire with Xi was a concession that would allow Chinese technology giant Huawei to resume purchasing items like semiconductors from American suppliers.
The US ban on business with Huawei, due to concerns about national security given the Chinese company’s opaque military connections had antagonised Beijing and deprived American technology companies of an important market. It proved to be a “lose-lose” arrangement for both sides.
Pressure on Trump also came from farm states where it’s estimated the US-China trade war has cost farmers $US1billion in lost exports. Soybean producers have been particularly hard hit as China shifted its sources of supply.
Farm foreclosures have spiked across the Midwest and states like Iowa and Ohio are critical to Trump’s re-election prospects.
In contrast to Trump’s own upbeat assessment of his agreement with Xi, Beijing has been more circumspect.
The official China Daily said there were no guarantees a trade deal would eventuate.
“Even though Washington agreed to postpone levying additional tariffs on Chinese goods to make way for negotiations, and Trump even hinted at putting off decisions on Huawei until the end of negotiations, things are still very much up in the air,” the paper, considered a state organ, said in an editorial.
Global Times, another Chinese media mouthpiece, observed that “compared with the early period of the trade war, the US now had a better understanding of China’s strength and will. More Americans know it is hard and unrealistic to crush China”.
This is the sort of nationalist viewpoint that weighs on Chinese officials in their discussions with their American counterparts. It is why it would unrealistic to expect Beijing to yield too much ground.
While China has not been as conspicuous as the US in its retaliation against tariff impositions on its exports, it has quietly been disadvantaging American companies in the China market.
According to the Peterson Institute for International Economics (IIE) Beijing has been slashing duties on American competitors at the same time that it has increased impositions on US imports.
The IIE estimates that US exports on average carry tariffs of 20.7 per cent compared with 6.7 per cent from America’s competitors. In such ways does China exact penalties of countries with which it is at odds.
Hass of Brookings has some useful advice for an administration that appears to have misread how to influence China in ways that are mutually beneficial: “If the goal is to compel China to alter its economic practices, Trump’s approach simply is not the way to do it”.
“Pursuing a zero-sum strategy toward China at the same time as launching attacks against allies and undermining the institutions of the postwar order is not a formula for success. It’s a recipe for failure,” he wrote. “And even more so, it is undermining confidence throughout the world in America’s strategic thinking on China.”
Hass notes China’s economy has “outgrown” its reliance on exports to the United Sates. In value-added terms, these exports now account for less than 3 per cent of Chinese GDP.
China’s greater concern would arise from a united front among its trading partners over its unfair trading practices.
For Australia and like-minded countries like Canada and Japan, the issue is not whether China is a mercantilist trading power but how best to re-set the trading rules of the game to try to ensure China does not use its size for unfair advantage.
Bolstering and reforming - rather than trashing - the World Trade Organisation would not be a bad place to start.
Tony Walker is a bluenotes contributor, former Financial Times correspondent in China and former Australian Financial Review political editor.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
16 May 2019
15 Feb 2019
14 Mar 2019
16 Apr 2019