Timely truce

The world has breathed a sigh of relief as China and the US reached agree­ment on re­duc­ing the US trade deficit, but ten­sions over trade and in­vest­ment re­la­tions may per­sist in the long term

NewsChina - - COVER STORY - By Yu Xiaodong

Af­ter months of threats and counter-threats to raise tar­iffs on each other, the US and China, the world's two largest economies, ap­pear to have averted an all-out trade war af­ter the sec­ond round of high-level talks on the is­sue held May 17-18 in Wash­ing­ton be­tween a Chi­nese del­e­ga­tion led by Liu He, vi­cepremier and spe­cial en­voy of Chi­nese Pres­i­dent Xi Jin­ping, and US of­fi­cials, in­clud­ing Trea­sury Sec­re­tary Steven Mnuchin, Sec­re­tary of Com­merce Wil­bur Ross and US Trade Rep­re­sen­ta­tive Robert Lighthizer.

Ar­mistice

Fol­low­ing the talks, the na­tions re­leased a joint state­ment pledg­ing to “sub­stan­tially” re­duce the US trade deficit in goods with China. To achieve that, there will be “mean­ing­ful in­creases” in US agri­cul­ture and en­ergy ex­ports to China in the fu­ture. Mnuchin told re­porters he ex­pected Amer­i­can agri­cul­tural ex­ports to China to rise by be­tween 35 and 40 per­cent this year and en­ergy pur­chases to dou­ble over the next three to five years.

On the is­sue of in­tel­lec­tual prop­erty pro­tec­tion, China pledged to “ad­vance rel­e­vant amend­ments to its laws and reg­u­la­tions in this area, in­clud­ing the Patent Law.” On the is­sue of in­vest­ment, “both sides agreed to en­cour­age two-way in­vest­ment and to strive to cre­ate a fair, level play­ing field for com­pe­ti­tion,” ac­cord­ing to the state­ment.

Liu told China's State-run Xin­hua News Agency that the two sides had “pledged not to en­gage in a trade war.” China's Min­istry of Com­merce (MOFCOM) an­nounced on May 18 that it was halt­ing its anti-dump­ing in­ves­ti­ga­tion into im­ports of sorghum from the US.

Mnuchin told the me­dia the two sides had made “mean­ing­ful progress” on the trade is­sue, and the US govern­ment would halt pro­posed tar­iffs on up to US$150 bil­lion in Chi­nese prod­ucts.

In the in­vest­ment field, Trump ear­lier hinted he would re­lax US sanc­tions on Chi­nese smart­phone-maker ZTE, which had been sub­ject to a seven-year ban on trans­ac­tions with US com­pa­nies. It was forced to sus­pend its business op­er­a­tions in the US af­ter vi­o­lat­ing a set­tle­ment with the US govern­ment last year over its se­cret ex­ports of tech­nol­ogy to Iran. For their part, China's reg­u­la­tory au­thor­i­ties ap­proved the US$18 bil­lion sale of Toshiba Corp's chip unit to a con­sor­tium led by US pri­vate eq­uity firm Bain Cap­i­tal. These is­sues, while not di­rectly re­lated to the trade spats, have been seen as bar­gain­ing chips.

Lines in the Sand

While the cease­fire has eased anx­i­ety in the fi­nan­cial mar­kets and sparked a jump in the Asian and US stock mar­kets, it has been crit­i­cized by trade hawks on both sides.

In the US, many ar­gued that the fail­ure to press China to agree to a quan­ti­ta­tive tar­get on cut­ting the trade gap and spe­cific mea­sures on in­tel­lec­tual prop­erty pro­tec­tion and in­vest­ment mean a to­tal vic­tory for China. Back in China, many con­sider Bei­jing's agree­ment to re­duce its trade sur­plus with the US a ma­jor con­ces­sion that be­trays ear­lier rhetoric that it was not afraid of a trade war and would “fight to the end.”

Mei Xinyu, a re­searcher at the Chi­nese Acad­emy of In­ter­na­tional Trade and Eco­nomic Co­op­er­a­tion at MOFCOM, ar­gued in a widely shared com­men­tary that China has man­aged to main­tain what he said were three “bot­tom lines” con­sid­ered non-ne­go­tiable by the lead­er­ship.

First, the two coun­tries agreed to in­crease US ex­ports to China, a “proac­tive” ap­proach in ad­dress­ing the trade im­bal­ance which con­trasts with the “pas­sive” ap­proach of re­duc­ing Chi­nese ex­ports, as the

Trump ad­min­is­tra­tion had threat­ened to do. Mei said that the proac­tive so­lu­tion adopted in the joint state­ment was in both coun­tries' in­ter­ests.

“By adopt­ing a proac­tive ap­proach, China can main­tain its pur­chas­ing power, which will pro­vide more mar­ket and em­ploy­ment op­por­tu­ni­ties to Amer­i­can business and work­ers,” Mei said. China has long ar­gued for a win-win so­lu­tion to ad­dress its trade dis­putes, rhetoric also adopted by the joint state­ment, which held that China would sig­nif­i­cantly in­crease its pur­chase of US goods and ser­vices “to meet the con­sump­tion needs of the Chi­nese peo­ple and the need for high-qual­ity eco­nomic de­vel­op­ment,” which “will help sup­port growth and em­ploy­ment in the US.”

Sec­ond, China suc­cess­fully avoided set­ting a spe­cific tar­get, such as the US$200 bil­lion fig­ure flagged by US of­fi­cials ahead of the talks. Ac­cord­ing to data re­leased by the US, its trade deficit with China reached a record US$376 bil­lion in 2017. On Chi­nese data, which uses dif­fer­ent cal­cu­la­tions which do not in­clude the value of parts of prod­ucts made out­side China, the fig­ure is a much smaller US$276 bil­lion. China has long ar­gued that the US fig­ure, which does not in­clude the trade sur­plus of US$54.1 bil­lion en­joyed by the US in the ser­vices sec­tor, rep­re­sents a dis­torted picture of bi­lat­eral trade. The Trump ad­min­is­tra­tion's quest for China to ac­cept a US$200 bil­lion re­duc­tion was seen by many in China as un­re­al­is­tic and hu­mil­i­at­ing.

Third, Mei said China had safe­guarded its right to “[up­grade] its in­dus­tries” and to “self-de­vel­op­ment,” re­fer­ring to the Made in China 2025 ini­tia­tive. When the Trump ad­min­is­tra­tion re­leased its list of Chi­nese prod­ucts sub­ject to tar­iff in­creases, it was widely con­sid­ered to be aimed at Made in China 2025, an ini­tia­tive to up­grade China's in­dus­try and boost China's high-tech sec­tors. As the US halted the pro­posed tar­iffs, China's grow­ing high-tech sec­tor can feel a sense of relief, at least in the short term.

Last­ing Peace?

But while trade ten­sion may have eased, few ex­perts be­lieve the joint state­ment means a fu­ture trade war has been averted.

Ac­cord­ing to Zhang Yuhuan, a re­searcher at the China In­sti­tute of In­ter­na­tional Stud­ies, the Trump ad­min­is­tra­tion has agreed to a cease­fire on the trade war be­cause of in­fight­ing within the ad­min­is­tra­tion.

There is a well-known rift be­tween trade hawks like US Trade Rep­re­sen­ta­tive Robert Lighthizer and White House trade ad­viser Peter Navarro, who have de­manded that China fun­da­men­tally change its in­dus­trial pol­icy, and mod­er­ates like Mnuchin and Na­tional Eco­nomic Coun­cil Di­rec­tor Larry Kud­low, who pushed for an agree­ment with China to ease the mar­ket's con­cerns. If there is a change in the dy­nam­ics of the in­fight­ing within the White House, the trade war could be rekin­dled.

Zhang said given the vague­ness of the joint state­ment, the real key to a last­ing con­sen­sus may lie in the fu­ture trade con­sul­ta­tions and ne­go­ti­a­tions out­lined in the joint state­ment.

The North Korea nu­clear is­sue may also have played a role in the de-es­ca­la­tion of trade ten­sions, as Trump pon­ders whether and when he should meet with North Korean leader Kim Jong-un. In a tweet posted a cou­ple of days af­ter the talks, Trump warned that, “China must con­tinue to be strong & tight on the Bor­der [sic] of North Korea un­til a deal is made,” claim­ing that it had be­come “much more por­ous and more has been fil­ter­ing in.”

Nev­er­the­less, trade dis­putes may pose a long-term threat to the Us-china re­la­tion­ship. Zhang said the Us-china trade im­bal­ance is down to their dif­fer­ent po­si­tion in the global di­vi­sion of la­bor, in which China has ad­van­tages in the la­bor-in­ten­sive and re­sour­cein­ten­sive sec­tors, while the US has ad­van­tages in the fi­nan­cial and high-tech in­dus­tries. As China de­vel­ops its high-tech sec­tors, trade re­la­tions be­tween the two coun­tries will only be­come more com­pet­i­tive in the long run.

To Zhang and Mei, fac­ing this new nor­mal in the Us-china trade re­la­tion­ship, China should main­tain “strate­gic pa­tience,” pro­mot­ing ar­range­ments that max­i­mize co­op­er­a­tion and bring mu­tual ben­e­fit to both coun­tries. Many an­a­lysts be­lieve that de­spite pos­si­ble re­cur­ring trade fric­tion, the two coun­tries can work to ac­com­mo­date both sides' in­ter­ests and keep the world econ­omy on the right track.

Chi­nese Pres­i­dent Xi Jin­ping’s spe­cial en­voy and Vice Pre­mier Liu He, also a mem­ber of the Po­lit­i­cal Bureau of the Com­mu­nist Party of China Cen­tral Com­mit­tee and chief of the Chi­nese side of the China

com­pre­hen­sive eco­nomic di­a­logue, talks dur­ing an in­ter­view in Wash­ing­ton, DC,S May 19, 2018

US Pres­i­dent Don­ald Trump’s spe­cial en­voy and Trea­sury Sec­re­tary Steven Mnuchin (C), leads a US S del­e­ga­tion to Bei­jing for trade talks with China, May ay 3, 2018

Tesla au­tos at 2018 Bei­jing In­ter­na­tional Automotive Ex­hi­bi­tion (Auto China 2018), April 29, 2018

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