Trump is talking up his trade truce with China. The reality is far more unsettling

At the post G20 Summit in Buenos Aires, US President Donald Trump held what the White House called a "very s...

Posted: Dec 3, 2018 11:27 AM
Updated: Dec 3, 2018 11:27 AM

At the post G20 Summit in Buenos Aires, US President Donald Trump held what the White House called a "very successful meeting" with Chinese leader Xi Jinping and agreed that current US tariffs on $200 billion worth of Chinese imports of 10% will remain unchanged for 90 days. Tariffs were due to be raised to 25% on January 1.

According to the White House, there will be a substantial increase in American exports to China of agricultural, energy, industrial and other products which will reduce the trade deficit in favor of China. The White House statement declares both sides will begin negotiations to resolve differences on forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft.

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Chinese state media reported Sunday that the two countries had reached "consensus on economic and trade issues" and that "healthy and stable economic and trade relations conform to common interests of the two countries and the whole world."

The reality is far more unsettling, especially for China. We are merely entering the next phase of what will be an enduring economic competition between the world's two largest economies. For America, the next 90 days is about assessing testing how much further China is prepared to compromise. For China, it must rethink its fundamental negotiating strategy and time is running out.

Consider how China has played this game.

When Trump first flagged his seriousness about tariffs, China promised to retaliate with its own measures in a tit-for-tat response. Surely American firms would not tolerate increased parts and products from China which would dilute their profit margins. American consumers care more about how much they pay for their latest gadget than where it is made or assembled.

Besides, the widespread Chinese assumption was that talk of a trade war was sparked by the President's obsession with current account deficits. In May, China apparently agreed to measures to reduce the then $375 billion surplus it enjoyed with respect to two-way trade with America even if there was disagreement about the size of the reduction. Send negotiators to work out ad hoc agreements for China to buy more American products and economic relations will continue in the same way as it had been before Trump came into power.

That was China's negotiating strategy: threaten retaliatory pain for American firms and consumers and shrink the trade surplus with America. A distracted and divided as American democracy would force Trump to call a truce. Beijing miscalculated.

To China's horror, Trump seems to believe his own rhetoric that trade wars are good and easy to win, especially when one is buying more from another country than selling to them. Washington has since made it not just about reducing the deficit but at attack on Beijing's supposed industrial policy and objectives.

This includes the "Made in China 2025" blueprint which is based on the twin pillars of Chinese "self-sufficiency" and Chinese domination of global exports in these sectors. To get there, America has accused China of blatant intellectual property theft and policies which offer the latter's national champions and preferred domestic firms all manner of unfair disadvantages such as subsidies, tax breaks and protection from foreign competition in Chinese markets.

If China is indeed guilty of these accusations, then it must delay its political and economic objective to become a "moderately prosperous society" by 2021 and a fully developed economy by 2049. If China is not, Trump has nevertheless placed the burden of proof on China to demonstrate that it plays according to the rules.

Meanwhile, inside China, Xi is being accused of triumphalism and unnecessarily picking fights with America. The Shanghai Composite Index has fallen almost 30% since the beginning of the year and the trade troubles come at a time when China is trying to de-leverage its economy while maintaining growth at the 6.5% target at the same time.

Xi will be desperate to avoid the tariff increase on its imports to America from 10% to 25% in 90 days' time. But offering to help increase American goods into China has only temporarily staved off the threatened 25% tariff at the beginning of 2019 -- and then only for 90 days. The pain for China is far from over and Xi might have to walk back his grand economic plans for the country.

In contrast, Trump has the benefit of a still buoyant stock market and a booming American economy to cushion damage inflicted by China.

How will he use his advantage? In his book The Art of the Deal, which was released in 1987, Trump wrote "My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I'm after." And he has further room to move. Getting tough on China economically is perhaps his only main policy for which there is broad Democratic support, significant as the latter has won control of the House in the recent Midterms.

If Trump wanted to discombobulate China, he has achieved that. But it is only a tactical and transient advantage. The problem remains lack of clarity with respect to objectives: going after Chinese intellectual property violations, greater access for American firms in China, discouraging distorting subsidies to state-owned enterprises and national champions, challenging Chinese plans to dominate industries as laid out in "Made in China 2025," disentangling critical American supply chains from reliance on China, or simply reducing the trade deficit.

In Buenos Aires, leaders of the other G20 countries stood warily on the sidelines as they have largely done so far. They would not disagree with Trump's insistence on free, fair and reciprocal trade and Trump needs other advanced economies such as the European Union nations and Japan on his side in this fight.

Yet to convince that it is about more than punishing China or gaining special advantages for only American firms, Trump has 90 days to make his case, not just to China but to the world.

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