Long-term eco­nomic com­pe­ti­tion is at the mercy of even longer-term geopo­lit­i­cal com­pe­ti­tion

Financial Mirror (Cyprus) - - MARKETS - By Phillip Or­chard

Last Satur­day in Buenos Aires, over grilled steak and Mal­bec one as­sumes were pro­duced do­mes­ti­cally, U.S. Pres­i­dent Don­ald Trump and Chi­nese Pres­i­dent Xi Jin­ping reached some­thing of cease-fire in the trade war. Four days later, it’s un­clear whether they agree on what they agreed to. The of­fi­cial state­ments they’ve is­sued sub­se­quently clashed in scope, tone and sub­stance. Not that the finer points will make much of a dif­fer­ence for the next few years. The U.S. and China are just be­gin­ning what will surely be a long, ugly process of eco­nomic dis­in­te­gra­tion that will dis­rupt both coun­tries and, given their eco­nomic in­flu­ence, al­ter the struc­ture of the global econ­omy.

But when the dust set­tles, each will still have am­ple in­ter­est in do­ing busi­ness with the other, mak­ing a nar­rower yet mu­tu­ally ben­e­fi­cial long-term ar­range­ment pos­si­ble in the fu­ture. The only way that changes is if the broader strate­gic com­pe­ti­tion with China dra­mat­i­cally in­ten­si­fies, in which case the U.S. will have ev­ery rea­son to weaponise trade.

The White House’s ver­sion of events is as fol­lows: China pledged to buy a “very sub­stan­tial” amount of U.S. agri­cul­tural, en­ergy and in­dus­trial goods, with pur­chases of farm prod­ucts be­gin­ning im­me­di­ately. Bei­jing also agreed to ne­go­ti­ate im­me­di­ately on Chi­nese prac­tices such as forced tech­nol­ogy trans­fers, in­tel­lec­tual prop­erty pro­tec­tion, non­tar­iff bar­ri­ers and cy­ber theft. In ex­change, the U.S. promised to de­lay un­til March a planned 15% jump in the Septem­ber round of 10% tar­iffs tar­get­ing some $200 bln in Chi­nese ex­ports. (It wasn’t un­til Mon­day that Trump said China, home to the world’s largest auto mar­ket, would re­move tar­iffs on U.S. auto ex­ports, which in­creased to 40% in July.)

But Bei­jing has said noth­ing about the 90 day ex­ten­sion, nor about which goods it’s plan­ning to buy, nor how it will buy them. (It has yet to con­firm Trump’s an­nounce­ment about auto ex­ports; nei­ther have Trump’s trade ad­vi­sors, for that mat­ter.) At no point did China even ex­hibit a will­ing­ness to talk about the trade prac­tices that helped spark the trade war in the first place, at least not pub­licly. Ac­cord­ing to Bei­jing, the up­com­ing talks will fo­cus on scrap­ping all tar­iffs im­posed by both coun­tries and on reach­ing a con­sen­sus on trade.

To be clear, the dif­fer­ences in the state­ments re­flect the ne­ces­sity of po­lit­i­cal sales­man­ship. But they also at­test to the dif­fi­cul­ties that con­found a more per­ma­nent agree­ment: China can’t con­cede on the big­gest is­sues at stake, and the U.S. isn’t un­der enough im­me­di­ate eco­nomic or po­lit­i­cal pres­sure to back down. So re­gard­less of what’s up for dis­cus­sion, ex­tend­ing talks by a few months is won’t make these chal­lenges any less dif­fi­cult.

Why the U.S. Won’t Back Down

The dif­fi­cul­ties lie not in the arith­metic of tar­iffs and trade but in the na­ture of the trade re­la­tion­ship it­self. China’s trade sur­plus ($375 bln in goods) is cer­tainly an is­sue – bring­ing it down was a cen­ter­piece of Trump’s pres­i­den­tial cam­paign – but it isn’t the main is­sue. In many ways, it tes­ti­fies to the power of U.S. con­sumers and the so­phis­ti­ca­tion of the U.S. econ­omy, and fix­at­ing on re­duc­ing the head­line fig­ure won’t bring back la­bor-in­ten­sive jobs lost to China. The U.S and China could have a mu­tu­ally ben­e­fi­cial trade re­la­tion­ship and still run a hefty trade im­bal­ance — so long as the U.S is able to com­pete with China on a level play­ing field. Cur­rently, it’s not. What the U.S. needs is the abil­ity to sell what the U.S. spe­cialises in (high-end goods and ser­vices) in China’s rapidly grow­ing mar­ket with­out fac­ing informal tar­iffs or fear­ing, for ex­am­ple, loss of sen­si­tive in­tel­lec­tual prop­erty to emerg­ing Chi­nese com­peti­tors that have un­lim­ited ac­cess to state lend­ing. It means play­ing by the com­mon set of rules China agreed to when it joined the World Trade Or­gan­i­sa­tion in 2001, and abid­ing by WTO rul­ings to re­solve com­plaints, just as the U.S. and its other trad­ing part­ners do when dis­putes in­evitably arise. Ad hoc, state-di­rected pur­chases of U.S. goods by China to dent the deficit won’t ad­dress these un­der­ly­ing struc­tural is­sues.

Early on, Bei­jing thought it could buy its way out of the trade war by dra­mat­i­cally ramp­ing up pur­chases of high­dol­lar U.S. goods it needed any­way, such as oil and gas, and by im­ple­ment­ing mod­est re­forms on mar­ket ac­cess and for­eign in­vest­ment. (In May, Xi’s top eco­nomic ad­viser, Liu He, thought he had reached a tem­po­rary deal with U.S. Trea­sury Sec­re­tary Steven Mnuchin, who even de­clared the trade war “on hold,” only to see the deal quickly scut­tled by more hawk­ish fig­ures in the White House.) Bei­jing would hap­pily buy how­ever much stuff it would take to al­low Trump to claim vic­tory on the deficit. Do­ing so would cer­tainly be cheaper and eas­ier than try­ing to bail out all the Chi­nese ex­porters that were about to get slammed by the U.S. tar­iffs at an eco­nom­i­cally in­op­por­tune time.

Re­in­forc­ing Bei­jing’s strat­egy was the (cor­rect) be­lief that tar­iffs would take a fi­nan­cial toll on the U.S. too. They would hurt U.S. con­sumers whose liv­ing stan­dards had im­proved thanks to cheap Chi­nese goods, U.S.-based firms de­pen­dent on in­puts made in China, and U.S.-owned ex­porters with fac­to­ries in China. (This doesn’t even ac­count for the pain caused to U.S. ex­porters by Chi­nese counter-tar­iffs.) Bei­jing as­sumed that with midterm elec­tions around the cor­ner, Trump would have lit­tle ap­petite for a mu­tu­ally de­struc­tive trade war that would rat­tle mar­kets and put the White House at odds with con­stituen­cies such as farm­ers and free-traders that tra­di­tion­ally vote Repub­li­can. And this, Bei­jing hoped, would dis­cour­age the U.S. from push­ing for struc­tural over­hauls in Chi­nese trade prac­tices.

Bei­jing’s strat­egy ev­i­dently fell short. The U.S. econ­omy is hum­ming along at the peak of the busi­ness cy­cle. The trade war has cer­tainly hurt cer­tain U.S. sec­tors, and there will be long-term costs to the U.S. econ­omy if it loses ac­cess to China’s gi­gan­tic con­sumer mar­ket — es­pe­cially if high-value ex­port­ing coun­tries in Europe and Asia don’t face the same bar­ri­ers. But the pain has been sub­tle enough, and trade pol­icy es­o­teric enough, to pre­vent the trade war from be­com­ing a ma­jor po­lit­i­cal is­sue. In fact, the con­gres­sional dis­tricts in which trade in­flu­enced vot­ers’ de­ci­sions tended to be the those that have ben­e­fited from new tar­iffs, par­tic­u­larly on steel and alu­minum. There weren’t very many of them, but they gen­er­ally sup­ported the trade war.

More prob­lem­atic for Bei­jing is that some­thing of a bi­par­ti­san con­sen­sus has formed in the U.S. that China has stopped mak­ing progress on its WTO com­mit­ments and that the onus is on the U.S. to stop China from en­joy­ing the ben­e­fits of the global trade sys­tem with­out abid­ing by its rules. (This view isn’t ex­actly new; it was the main im­pe­tus be­hind the Trans-Pa­cific Part­ner­ship, from which Trump with­drew.) There’s also a grow­ing con­sen­sus that Chi­nese prac­tices such as forced tech­nol­ogy trans­fers, out­right tech­nol­ogy theft, and its overt, state-backed “Made in China 2025? plan n to dom­i­nate high-tech in­dus­tries are in­deed a threat to U.S. in­ter­ests and the “rules-based or­der” — even if there’s am­ple dis­agree­ment over whether puni­tive tar­iffs are an ef­fec­tive way to ad­dress them.

Add to this the sus­pi­cions sur­round­ing Chi­nese geopo­lit­i­cal am­bi­tions. For those who think Wash­ing­ton and Bei­jing are slid­ing in­ex­orably to­ward a new Cold War, the

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