The US-China trade war just got even uglier

Both countries will suffer but China will take the brunt

May 14, 2019
Photo: Pang Xinglei/Xinhua News Agency/PA Images
Photo: Pang Xinglei/Xinhua News Agency/PA Images
Barely a couple of weeks ago, President Trump referred to the prospect of “an epic trade deal,” describing the negotiations between the US and China to bring an end to the trade war.

Yet last Friday, with Chinese negotiators in Washington, Trump authorised a hike in punitive tariffs on Chinese goods, which was originally set for 1st January but was put into the deep freeze pending the outcome of these talks.

Over the weekend, Trump said that the US would publish a plan to extend such tariffs to the half of imports from China not yet affected, taking effect in a month if the talks make no progress. The Chinese delegation has gone home, and there may yet be a twist that allows a weak agreement to push back a full-scale trade war. The optics, though, are not good. How worried should we be?

In spite of the theatrics, the US and China have most likely already agreed some things, for example that China will buy more US agricultural products, as well as energy goods and aircraft. It will be also be prepared to allow US financial firms improved access to Chinese markets, perhaps some other firms too. Restrictive regulations capping foreign ownership of Chinese firms could be addressed.

But these comprise the low hanging fruit. What the US really wants is meaningful and verifiable change in China’s laws and regulations, associated with forced technology transfer to local companies, inadequate intellectual property protection, cybersecurity, and the protectionist practices underlying China’s industrial and technological development policies.

The US believes China reneged on certain commitments that it thought had been agreed. China disagrees and says there were simply disagreements over the text of a deal. But the issue arose late in the day. It could have been a misunderstanding that was lost in the language of trade diplomacy. It might have been a miscalculation by China that the US negotiating position and economy were weaker than they are. Or it might have been a deliberate last minute pushback to try and change the terms of the agreement, reflecting a hardening of view in Beijing.

Whatever the circumstances, China’s chief negotiator Liu He gave a press conference in Washington to the Xinhua News Agency in which he said that, while talks were ongoing and the two sides agreed on several things, they also had several differences. The three key issues, he said, were that the US should remove its tariffs, there should be reasonable increases in Chinese imports from the US, and the text of any agreement should be balanced and ensure dignity.

If there is still some disagreement about the Chinese commitment to additional purchases from the US, it ought not to be a deal-breaker. The other two issues, though, are. The US wants to keep tariffs in situ as a way of forcing China to honour its commitments. It also wants to be able to use tariffs to enforce compliance, without the risk of retaliation. The “balance and dignity” references almost certainly mean that the Communist Party will not agree to change or amend its laws or surrender sovereignty in any way to a foreign power. This is a key issue.

China may be prepared to take steps to boost intellectual property protection and address other US demands but it certainly does not want them detailed in any statements and agreements, and will insist they do not conflict with the Party’s core philosophy, or its preferred modus operandi of ad hoc regulations and State Council directives. The US view is that this is insufficient and reflects the status quo, where a plethora of Chinese regulations and conditions, often laid down by local and provincial governments, dilute or thwart vaguely worded and ambiguous policy statements.

In some ways, then, the US is chasing shadows. Even if laws were changed or introduced, there would be no guarantee that they would be effective, especially in a country where the rule of law does not exist. The recently approved Foreign Investment Law, for example, ostensibly offers equal treatment to and support for foreign firms, eliminates the requirement to transfer proprietary technology, and introduces a punitive damages mechanism to protect against intellectual property infringement. Yet its wording has been criticised by lawyers as vague and ambivalent. The law does not address low level and local government regulations that protect domestic firms and industries, does not protect against political interference, and doesn’t address the endemic problems of surveillance and commercial espionage.

There are two weeks to go before the tariff hike to 25 per cent on about $200bn of imports from China becomes effective. That would bring the total of tariffed imports to $250bn. There is then a month to go, roughly, before the higher tariffs would be applied to another $300bn of imports, which include computers, laptops, smart phones and other consumer goods, many of which comprise brands or components associated with other countries, not just China.

China has already amounced that by way of retaliation to the immediate tariff hike, it will subject $60bn of imports fromthe US to tariffs of 20-25 per cent, bringing the total of affected goods to $110bn—or almost all of them. Other forms of retaliation beckon, for example, cessation of purchases of specific products, such as Boeing aircraft, or a clamp down on US service industry providers, or regulations to make commercial life more difficult for US firms.

A G20 summit in Osaka, Japan is scheduled for the 28th-29th June, and provides an opportunity for President Trump and President Xi Jinping to meet privately to seal a possible deal, if it were still possible to rescue it.

Without an agreement by the G20, there would be no chance to resurrect this round of talks. The economic effects of failure would be felt around the world but I think China would feel them more than the US. Additional policy easing in China would probably be needed though the authorities would rather not risk more credit creation. Weaker Chinese growth would feed through into Asia and the rest of the world. Companies in China would continue looking to shift supply chain operations elsewhere.

Even if there were still to be a deal, though, it would make little difference to the new world disorder, in which commercial and other tensions are a permanent feature in the relationship between China and the US, and the west.