Donald Trump and Xi Jinping have brokered peace. It will be sorely tested
What Donald Trump and Xi Jinping did in Buenos Aires was buy time. Three months, in fact. Which is good when measured against the alternative: which was a full-blown trade and broader economic war between the two countries. Which in turn had the potential to trigger a further collapse in global
market sentiment, particularly coming on the back of other negative trends emerging in both the US and Chinese domestic economies.
But a word of caution to markets, even from those of us who have been arguing publicly that on balance a deal of some sort between China and the US was more probable than not: one swallow doth not a summer make. Much can still unravel. Both Trump and Xi have indeed bought valuable, though limited, time for themselves and the world. But for different reasons.
There are five complex baskets of policy disagreements to work through. First, the current annual $370bn bilateral trade deficit needs to be reduced. Major Chinese purchases of American natural gas will account for much of this, and probably at the expense of Qatar and Australia, both US allies. Trump also stressed that China would begin to purchase more agricultural products, though what exactly this will entail is unclear.
Then there are the possible cuts to tariff rates themselves. The Chinese average tariff rate currently stands at about 9.8% compared with a US average tariff rate of 3.4%. Then there are those industry sectors that are most politically sensitive in each economy, led by agriculture: Republican-voting farmers in the US, matched by China’s historical paranoia over national grain self-sufficiency.
One radical solution from China might be to propose a phased but quick reduction of average tariff rates to zero (or as close to zero as you can get). That would capture global market sentiment big time by rowing back the current tide of global protectionism, putting flesh on the bones of Xi’s Davos declaration in January 2017 as the champion of free trade.
Then there are the three hardy perennials: intellectual property protection; forced technology transfer (a US term); and the use of the full resources of the Chinese state to support China’s stated national industrial strategy (Made in China 2025) to domi
nate global advanced technology markets and product standards by 2030. These three are the really ugly ones.
Setting a deadline of 1 March 2019 to resolve these five problems is smart. Particularly if it’s driven hard by the prospect of a further working-level summit with Trump and Xi later in March. Alternatively, it can be argued that 90 days is so ambitious that it’s unrealistic, and sets both sides up for failure.
But this delay also serves Trump and Xi in additional ways. By March, Trump will have a fuller idea of the lay of his domestic economic and political landscape. He will then know the extent of any significant softening in the economy already induced by monetary policy tightening by the Fed, and the extent to which the American economy could then sustain further tariffs should the efforts of Chinese and American officials have come to naught.
On the political front, the Mueller investigation should also have reported by March. If the results of the investigation are seriously bad for Trump, then we should be alert to the possibility of Trump having a renewed