US and China need each other and must reach deal on trade

A wise saying about negotiations is that to win you have to be prepared to walk away. Fortunately the trade talks between China and the United States have not reached that point, despite President Donald Trump threatening to raise punitive tariffs on US$200 billion of Chinese imports and roiling jittery world markets. After mixed signals from Beijing sources about the next visit to Washington by chief negotiator Liu He, the foreign ministry confirmed China was still preparing to send a delegation this week for more meetings. A spokesman said China’s positions were clear and the US was well aware of them, indicating that despite the threat of more tariffs Beijing has made its best offer at this stage.

Politics has played a part in Trump’s brinkmanship and China’s response. In the US, being tough on China is one of the few policies on which Republicans and Democrats can reach bipartisan consensus. With the economy finely balanced, Trump does not want to take the risk, ahead of a re-election bid next year, of being blamed for a deal that is perceived as soft on China. He needs an agreement he can sell to his political base in rural states.

China also needs a deal, but has a few political considerations of its own, even though its economy is showing signs of recovery and the employment outlook remains manageable. There is debate about how much China has to concede to the US, with some officials amenable to more concessions given that China is destined to be the biggest market. But President Xi Jinping has to strike a balance between the economy and politics. He needs to be wary of the political cost of concessions that weigh too heavily on China’s rural economy and threaten social stability. And preferential treatment for US companies will risk the trust and goodwill of other countries. So we should be prepared for outbreaks of brinkmanship until the last minute, with Xi playing a long game.

In the short term, markets are likely to remain very jittery, with Hong Kong being especially exposed to external fluctuations. On the bright side the worse the outcome, especially if there is no deal, the more important Hong Kong will become to China as a bridge. The current tension should prompt officials to be prepared for this key role in finance and trade. That said, in the long run both economies are going to need each other. So-called decoupling is not an option. Regional small economies are at risk of collateral damage from continued conflict. The political and economic obstacles to a deal may be formidable, but it is paramount to the global economy that the two sides strive for a settlement they both need. After all, when the trade war is over, rivalry will continue on the technological side with the prospect of another decade or two of confrontation.