By Manish Uprety F.R.A.S. and Dr. Yiyong Liang*
Trade wars are fascinating where not only the outcomes but also the tactics and strategy matter. Sun Tzu said: “All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”
The world was waiting with a baited breath for easing out of tensions between the U.S. and China during the meeting of President Donald Trump with Vice Premier Liu He. The ongoing China-U.S. trade war resulted in profound consequences including contributing to conditions pushing the entire global economy to the edge of a possible recession in 2020. The accompanying contortions including contradictory reports and veiled criticisms alongside high rhetoric from both sides was not of much help either.
Yet there was hope when the U.S. dropped its designation of China as a “currency manipulator”, just two days before the two countries were scheduled to sign an agreement at the White House to start resolving their trade war. It matters as the escalation of trade war between the two countries and the concomitant rhetoric had rattled the supply chains, investors, lawmakers, businesses and roiled financial markets amid continuing uncertainty about the trade war’s trajectory for over two years.
The signing of the first phase of the trade deal between the world’s two largest economies occurred at a time of slowing down of the global economy which experienced its slowest expansion in a decade. While Chinese President Xi Jinping has hailed the deal as “good for China, the U.S and for the whole world”, Trump called it an “unbelievable deal”.
The first phase of the trade agreement between the U.S. and China primarily focused on Intellectual Property Protection and Enforcement, ending forced technology transfer, dramatic expansion of American agriculture, removing barriers to American financial services, ending currency manipulation, rebalancing the U.S.-China trade relationship and effective dispute resolution.
In a nutshell, the agreement at this juncture will relax U.S. sanctions on China and China, in turn, will increase purchases of mainly U.S. farm products. However, even after the signing of the agreement, U.S. tariffs on $360 billion in Chinese imports will stay in place apart from the reduced tariff rate on another $112 billion worth of goods from 15% to 7.5%.
It is worth mentioning that the signing of the deal presented a stark contrast to the tremendous hostility and brinkmanship between the U.S. and China who had been close to each other since the days of the anti-Soviet jihad in Afghanistan. The U.S.-China bilateral relationship has over the last thirty years been one generally of cooperation with episodes of disagreement. Tiananmen had set back relations, but the subsequent opening up of China had seen U.S companies rush into the Chinese market.
From an American perspective, President Trump who will be running for his second term fulfilled his campaign promise of 2016 about getting tough on China. The falling of the U.S. trade deficit by about 16 per cent with China and renegotiations of trade terms with China at a time when the House of Representatives has voted to send articles of impeachment against Trump to the Senate for a trial would have a salubrious effect on Trump’s presidential campaign.
In an election year in the U.S., despite the limited nature of the trade agreement and feasibility questions around Chinese purchase targets in the first phase, for the incumbent Republican administration, the deal is widely perceived to be a positive development for the president’s bid for re-election.
However there are many detractors of the trade agreement within the U.S. itself such as the Democratic House Speaker Nancy Pelosi who lambasted the accord’s “absence of concrete progress, transparency or accountability”. Pelosi said: “President Trump’s failed China strategy has inflicted deep, long-term damage to American agriculture and rattled our economy in exchange for more of the promises that Beijing has been breaking for years.”
On the other side, there is also a strong perception in China that the country gave way too much in the trade deal. The primary reason for this is that in the first phase the U.S. authorities will retain existing tariffs on most of the taxed Chinese exports to the U.S.
Chinese exports matter to China a lot as the country’s political system is inherently linked to its economic model. The general impression is that phase two of the trade deal between the two countries will focus on forcing deeper, structural reforms of China’s state-led economic model by the U.S.
This shall be perceived as an attempt by the U.S. to dismantle China’s state capitalist model that has the relationship between the government and State Owned Enterprises (SOEs) as a key characteristic such as the ambitious ‘Made in China 2025’ programme which is designed to help Chinese companies excel and become world-class leaders in emerging technologies.
In addition, how new trade rules introduced by the U.S. construed by China as illegal sanctions shall impact the notion of “free market” fare, would be very interesting to see. Any threat to increase tariffs again by the U.S. shall be unpalatable to China. According to just released figures by Chinese National Bureau of Statistics, the country’s economic growth hit new low – 6.1% – in 2019, the lowest in decades, which does tell parts of the story. It shall be back to square one as it would make the next phase of the trade deal very difficult, and once again rekindle global anxieties.
It’s not that the world is already not anxious. Phil Hogan, the EU trade commissioner considers the first phase of the deal as a political act by Donald Trump to win re-election and is a big critic of the deal because of its limited economic benefits, and negative impacts on both competitiveness and jobs which are the desired objectives of President Trump.
It has relevance to the EU because it is strongly resisting to opening up its markets to large-scale U.S. agricultural imports whereas it seeks similar terms of trade with China in areas like intellectual property in bilateral investment treaty. The U.S. has threatened EU with punitive measures and to separately apply tariffs such as in the case of French goods in connection with a spat over digital taxation or automotive tariffs on Germany on national security grounds.
An important question which is being asked is whether a preliminary trade agreement, reached during a period when China-U.S. strategic relations are clearly declining, can really work? Will it be replaced by new conflicts or further progress as negotiations continue?
China’s growth has been a rapid one. Its per capita income was half of that of India in 1974 but now China remains far ahead of India in economic as well as most other parameters. It has become a major trade partner in most of the sectors for most of the countries of the world including the U.S. The U.S. Goods and Services Trade Deficit with China was $378.6 billion in 2018.
The decision of the U.S. to close its Current Account Deficit by the year 2050 is bound to affect China’s economy. There are genuine concerns that if Trump is re-elected, the U.S. government might pursue greater decoupling of two economies for geopolitical reasons.
This would not be in the interest of China as the country faces its own set of challenges such as rapidly aging population, decreasing workforce, increasing debt, risk of falling into middle income trap, currency issues etc. In addition, China has been investing heavily across Europe, Asia and beyond through its Belt and Road Initiative (BRI) to build a group of nations as business partners connected by network of belts and roads but these initiatives shall fully mature only in the 2040s.
Therefore China would want to avoid a Cold War like scenario with the U.S. and would prefer close economic connections even though fraught with conflicts to help stabilize and manage geopolitical rivalry as it move towards a “new era” with the key date being the year 2049, the centennial of New China.
In that sense it would be better to interpret the first phase of the trade deal between the U.S. and China as a trade truce. The relationship between the two countries is going to be the one that is largely characterized by disagreement and friction where there are few episodes of agreement.
The relationship between the U.S. and China matters very significantly to a rapidly evolving world. In the aftermath of BREXIT and ‘Merkelisation’ of the EU, the very notion of Europe to ensure the centrality of European power and its influence in the world is now fast cracking up. Adverse demographics, prolonged economic slowdown and financial crisis and have put paid to the very idea that once united the EU.
Interestingly, the U.S. is also rapidly changing and by midway this century will no longer be a European dominated society. In addition, there are newly emerging countries of Asia, Latin America and Africa who are rising economically and militarily. All of them deeply connected to both U.S. and China to various degrees.
So while the critics of the first phase of the U.S.-China trade agreement say that it will go only part way toward resolving a crisis and that the trade war will continue to slow the global economy, one sincerely hopes that it generates a positive momentum for future talk.
Regardless of the outcome of this ongoing trade war, in an even bigger picture, comprehensive competition with cooperation(s) between the two countries for global supremacy (or influence) will certainly continue in the long run. The show isn’t over yet and please do wait for what’s next?
* Manish Uprety F.R.A.S. is an ex- diplomat and Dr. Yiyong Liang is an Associate Professor with Hebei University, China