04 Jul 2019
A temporary truce not a long-term accommodation. Or a permanent solution.
That is a realistic assessment of progress towards an outline trade agreement in Washington last week between American and Chinese negotiators - pending a more comprehensive deal that may, or may not, materialise.
"A continuing trade war could cost the global economy around $US700 billion in 2020 – a loss equivalent to the size of Switzerland’s entire economy.”
On two previous occasions truces in the trade war crumbled. One struck in Buenos Aires in December, 2018 on the margins of the G20 lasted five months. Another reached in Osaka in June this year survived just one month.
Despite this poor history, America is talking up this latest advance.
US President Donald Trump described preliminary understandings as a “very substantial phase one deal”. These understandings mainly revolve around Chinese undertakings to accelerate purchases of US agricultural products.
The US has put off - temporarily - an additional tariff hike on Chinese imports on top of those already in place. A potential sticking point in negotiations on this comprehensive agreement is China’s insistence all tariffs be lifted once a deal takes effect.
Tariffs on $US250 million worth of Chinese imports were set to increase from 25 per cent to 30 per cent earlier this week. By the end of this year the Trump administration had threatened to impose tariffs on virtually all Chinese imports in an escalating trade war.
Time for compromise
Further escalation now seems less likely. If this proves to be the case it would be a relief for a battered international trading system against the background of a slowing global economy.
Edward Alden, senior fellow at the Council on Foreign Relations, reckons the rising costs of a trade war for both sides now make compromise more likely.
“It’s pretty clear that the US and China have fought the trade war to a stalemate. At the moment, neither side sees any real advantage in escalation. The president wants an off-ramp for electoral reasons, and I think the Chinese want an off-ramp primarily for economic reasons,” Alden told The New York Times.
Negotiators will seek to put some meat on the bones of an agreement to be signed by Trump and his counterpart Xi Jinping when they meet in Chile in November on the margins of the APEC forum.
It’s not clear how comprehensive such a deal would be given the complexities of trade issues that separate the two countries.
If progress were made on issues like intellectual property, forced technology transfer and the way in which China sets the exchange rate of the Yuan, that would represent a step forward.
The US has declared China a “currency manipulator”.
What seems unlikely, however, is a breakthrough agreement on deeper structural reforms of the Chinese economy to improve market access for American companies. That is beyond vague commitments Beijing has offered in the past.
A US “technology war” against Chinese technology companies, principally technology giant Huawei, remains intractable. The US is continuing to blacklist China’s technology companies even as it negotiates a trade deal.
In the sights of the US particularly are Chinese AI companies. These are seen as providing a particular threat to US companies in a field China is beginning to dominate.
US officials have pointedly excluded technology companies like Huawei from the trade negotiations.
That said, both Trump and Xi have domestic pressures that should progress an agreement both sides can live with – with again the proviso negotiations have faltered in the past.
With a presidential election year pending, Trump needs to relieve pressures in his Republican heartland states where American farmers have been particularly hard hit by the trade war.
Trump would seem to need a deal more given these political pressures.
In Xi’s case, rising food prices and shrinking exports to the US against the background of slowing economic growth are exerting their own pressures. An outbreak of swine flu has taken 100 million pigs out of circulation, pushing up pork prices.
The authorities have been obliged to draw on China’s emergency pork stockpile to stabilise sky-rocketing prices.
Xi has the additional worry of continuing disturbances in Hong Kong. These will be distracting.
Costs to both sides from the trade war are showing up in export figures. In September, China’s exports to the US - its biggest export market - were down 17 per cent to US$36.5 billion following a 16 per cent decline in August. US exports to China declined 20 per cent to US$10.6 billion after falling 22 per cent in August.
Moreover, the US-China trade war is having a measurable effect on global growth at the very moment when the international economy is slowing.
The International Monetary Fund (IMF) last week warned a continuing trade war could cost the global economy around $US700 billion in 2020 – a loss equivalent to the size of Switzerland’s entire economy.
American and Chinese interpretations of what was achieved in last week’s agreement vary widely, no doubt reflecting differing political pressures.
Politically, Trump needs to demonstrate his trade strategy is working, even if its costs outweigh its benefits.
This would explain his description of the agreement as the “greatest and biggest deal made for our great Patriot Farmers (sic) in the history of our country”.
On the other hand, China’s state-run media reported the two sides had “agreed to make joint efforts toward eventually reaching an agreement”.
In other words, this is far from a done deal even in its limited form. It represents an easing of trade tensions and the possibility of a comprehensive deal but the situation remains fragile.
Somewhere between the “greatest and biggest deal in the history of our country” and a circumspect Chinese response will lie the truth.
This is not to deny reasonable progress was made. Rather, it is to indicate that talk of a $US50 billion Chinese purchasing bonanza for American farmers is almost certainly an exaggeration.
In 2017, China outlayed $US24 billion US agricultural products. In 2018 Chinese accounted for just $US9.3 billion worth of US farm exports.
These numbers tell their own story of the extent to which a trade war has harmed American farmers who had come to rely on the Chinese market.
On the heels of the US-China announcement of progress in trade negotiations, Kevin Rudd and fellow former prime ministers including Helen Clark of New Zealand and Joe Clark of Canada warned in a New York Times op-ed of the risks associated with continuing trade disturbances.
“America’s and China’s prosperity have been built on global trade…Now, however, we see global growth in trade lagging behind general economic growth for the first time in decades,” they wrote.
Rudd and his fellow former prime ministers also warned of the risks of a de-coupling of the US and American economies, particularly in technology and finance.
“Such a decoupling would present a long-term threat to global peace and security,” they wrote.
“It would also effectively constitute the first step in the declaration of a new Cold War. As with the last Cold War, many nations would be forced to choose between the two powers. And that is a choice none of us want to make.”
A US-China trade agreement would indicate a step back from a “decoupling”. Failure would add to concerns about a fragmentation of the global economy and breakdown of a rules-based trading order.
These are high stakes.
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.
04 Jul 2019
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