The trade war could well end in November, with Donald Trump and Xi Jinping calling a truce

Deng Yuwen says signs are pointing to the US-China trade war ending in November
Donald Trump has made an overture to Xi Jinping, and the Chinese have hinted at the possibility of making concessions to the Americans

Deng Yuwen

Published: 2:00am, 31 Oct 2018

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Since the start of the US-China trade war, the situation has been on an expected downward trajectory. Since US President Donald Trump threatened to impose tariffs on the remaining US$267 billion of Chinese goods, markets have worried about the decoupling of the two economies.

But I’m making a bold prediction that the trade war will end before the end of the year, and signs are already pointing to this.

Be it in theory or history, there is no question that trade wars are detrimental to both sides. Rather, it’s a question of how detrimental. The Chinese have called the battle the “largest trade war in economic history”, and it is impossible that it has hurt China but made no impact on the US.

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According to China’s trade data for the first three quarters and UNCTAD investment data for the first half of the year, the trade war has yet to achieve the US’ aims of improving the trade deficit and attracting foreign investment. China’s goods trade grew by 9.9 per cent to 22.28 trillion yuan (US$3.2 trillion) in the first nine months. Its exports rose 6.5 per cent, and its trade surplus was 1.44 trillion yuan.

China’s trade surplus with the US reached record highs in August and September, passing the US$30 billion mark for both months. Either this is a direct result of declining growth in US exports to China, or the full impact of the trade war has not been felt. Either way, it underscores the difficulty of reversing the US’ trade deficit through a trade war.

Let’s not overlook the bigger picture. China’s exports to Europe and Southeast Asia are growing fast, and China is also pushing into markets in Russia, Poland and Africa. A decrease in exports to the US market could be partly offset by an increase in exports to the above-mentioned markets.

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So the overall impact on China’s exports should not be that significant, much less fatal. In addition, China attracted the largest inflow of foreign direct investment in the world in the first half of the year, up 6 per cent to more than US$70 billion, while foreign investment into the US plummeted 73 per cent. Apparently, Trump is so far failing in his attempt to attract more foreign investment to the US.

However, it is difficult to judge whether the above data – and the recent stock market bloodbath in the US – will force the Trump administration to rethink its threat to escalate the trade war. Meanwhile, the Chinese are not treating the trade war lightly, though the data has boosted their confidence to stand up to the Americans.

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The trade war is mainly a war on confidence. The Chinese markets had already been sent into a panic by the deleveraging campaign, and the trade war further contributed to their fragility. The market economy is a confidence economy. When confidence runs low, the economy will run into trouble sooner or later.

From this standpoint, both the US and China might actually want a ceasefire. Beijing is honest about this, and White House economic adviser Larry Kudlow has disclosed that the two heads of state will meet at the G20 summit in November. Trump might agree to a truce, if Beijing’s conditions satisfy him. But what would satisfy him?

Trump claims to be a master of trade. In a way, his trade war on China is from his playbook for North Korea: applying extreme pressure to force the other side to the negotiating table. It worked on Kim Jong-un, but China has held up better under Trump’s onslaught of tariffs than he expected.

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Still, Trump held out hope of resolving the dispute in a direct meeting with Chinese President Xi Jinping. He made an overture to Xi in a statement, even as he hit China with tariffs on US$200 billion in goods.

The G20 meeting is an opportunity for the two leaders. It would not be appropriate for Xi to attend the summit and not meet Trump. But should the Trump-Xi meeting fail, it would be better not to have met in the first place.

Kim Jong-un walks with Donald Trump during a break at the historic US-North Korea summit at Capella hotel on Sentosa island in Singapore on June 11. Photo: AFP

Therefore, the two sides must be going to the meeting prepared, and compromises are going to be reached. In other words, Trump is unlikely to make indiscriminate demands China would not agree to. At the same time, the Chinese could also be more flexible on some matters of principle and make greater concessions to the US.

This is clear from a speech China’s central bank governor, Yi Gang, gave at the recent G30 International Banking Seminar, and the outside world should pay attention to three points he made. First, he reminded the US not to focus only on its trade deficit with China. In terms of trade in services, the US has a huge surplus.

Also, a large number of US-owned enterprises are producing and selling goods in China, but they are not included in the US-China trade data. Second, China is prepared for the worst, but “still sincerely hopes to find a constructive solution”.

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Third, Beijing aims to solve structural problems with the Chinese economy by speeding up domestic reforms and opening up further, strengthening intellectual property protection and considering “competitive neutrality”, i.e. no more favouritism for state-owned enterprises.

China is celebrating the 40th anniversary of its reforms at year’s end, and it should be making a substantive response to the international community’s concerns about its economic reforms.

Moreover, since the trade war began, the Chinese – from members of society and scholars to senior officials and the official media – have expressed anxieties about the state of reforms in China. Xi should see he wouldn’t be able to get away with superficial reforms any more.

People's Bank of China governor Yi Gang meets US Treasury Secretary Steven Mnuchin on the sidelines of a World Bank conference in Bali on October 11. In recent remarks on the trade war, Yi has said China is prepared for the worst. Photo: Handout

So, if Yi’s speech is indicative of Beijing’s latest attitude towards the trade war – and it probably is – then Xi’s gift to Trump could be competitive neutrality. China could address favouritism granted to its state-owned enterprises to meet the US’ requirements.

Furthermore, in a recent interview with the state media, Vice-Premier Liu He revealed that “China and the US are now in contact with each other”.

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What could they be in contact about, other than the terms of the Trump-Xi meeting? If the two sides can finalise a gift list, the meeting should go according to schedule, and the world can reasonably expect Trump and Xi to call a truce.

However, if Trump decides to fight the trade war to the end, Yi has already issued a warning: China is prepared. It could target the US’ trade-in-services surplus and US enterprises in China, even if it means hurting Chinese jobs.

Deng Yuwen is an independent scholar and a researcher at the China Strategic Analysis Center Inc. This article was translated from Chinese

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