How Trump and Xi saved the world from economic pain and turned the trade war into a win-win situation

  • Zhang Baohui says the US has dropped a key contentious issue, the ambitious ‘Made in China 2025’ plan, from the bilateral trade agenda, which is a win for Beijing. But China is also making concessions in two major areas to the US
PUBLISHED : Wednesday, 05 December, 2018, 1:04am
UPDATED : Wednesday, 05 December, 2018, 6:11am

To the relief of the world, the much-anticipated Trump-Xi summit at the G20 meeting in Argentina did result in a temporary agreement between the United States and China to halt their trade war. This achievement, though tentative and fragile, serves the interests of the global community. Indeed, this meeting was closely watched by everyone, given the significance of its outcome, which could either avert or push the two countries towards a new cold war, a scenario that would force other nations to choose sides. A win-win outcome

According to the White House, President Donald Trump agreed to leave the tariffs on US$200 billion worth of Chinese goods at 10 per cent, and not to raise the rate to 25 per cent as planned on January 1, 2019. China in return will “purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries”. Also, China will start to purchase agricultural goods from the US immediately.

Moreover, the two presidents have agreed to “immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavour to have this transaction completed within the next 90 days”, according to the White House.

Trump-Xi ceasefire isn’t enough to resolve their deep divisions

The issues notably absent from the above list are China’s industrial policies and reform of its state-owned enterprises. Indeed, in the lead-up to the summit, the greatest obstacle to trade negotiations was Washington’s insistence that Beijing scrap “Made in China 2025”, a plan that uses state subsidies to promote industrial and technological upgrading.

The US also pressed for reform of the Chinese economic model itself, which centres on large state-owned enterprises that receive generous financial support from the government to compete against private business from other countries.

In the eyes of China, assaults on its industrial policies and economic model are unacceptable. Indeed, China perceives the US as intending to contain it and prevent its emergence as a technological equal.

It has been said that there are three kinds of trade issues between the US and China. The first concerns trade imbalance, and China is willing to massively increase imports from the US. The second concerns market access for US firms in service sectors, forced technology transfer and intellectual property theft, and China has said it is willing to accommodate legitimate US concerns in those areas. The third involves China’s industrial policies, including “Made in China 2025”, but Beijing has argued that the issue concerns China’s future and is not subject to negotiation.

The agreement reached at the G20 summit includes the first two issues but omits the third. The deal is thus a win for Beijing. Its industrial policies and reforms of its large state-owned enterprises, the most contentious issues, are no longer on the agenda of the trade war. This should please Beijing.

The three issues Donald Trump and Xi Jinping need to iron out to end the trade war

However, by acknowledging US grievances about trade imbalance, market access and intellectual property rights, Beijing is taking a major step to address Washington’s concerns. The US will reap significant gains from a more balanced trade relationship, greater access to the Chinese market and better protection for US technologies. This is an important win for Trump and Washington too.

In essence, the agreement enables win-win outcomes. It reflects the wisdom of the two leaders. Both have tried and succeeded in defending their national interests while giving due respect to the core concerns of the other party.

The agreement also shows that economic interdependence does moderate conflicts between states. While a trade war has been more damaging to China, the US has suffered as well. Indeed, recent downward trends in the US stock markets and General Motors’ announcement of lay-offs, which was partly attributed to rising production costs and tariffs on Chinese imports, are proof that a trade war hurts everyone. According to officials quoted by The New York Times, such economic woes “rattled” Trump. Then there are the farmers who have been hurt by the trade war, in states important to Trump in the 2016 presidential election and possibly in the next, in 2020.

Clearly, the US trade hawks have underestimated the costs of the trade war to the US economy. The rationale that a smaller loss for the US means a win is misguided. Trade wars leave both parties worse off.

For Chinese immigrants, the American dream is over

Still, while the agreement at the G20 meeting is highly commendable, its impact on broader Sino-American relations may be limited. The reality remains that China and the US are strategic rivals in many other aspects.

So there could be a bifurcation in Sino-American relations in the future. While the two countries may be able to negotiate settlements and manage trade disputes – because of their economic interdependence – they will continue to compete in military, diplomatic and technological arenas. As Matt Pottinger, a senior administration official at the National Security Council, has said, the Trump administration has shifted to a “competition” policy on China. This implies that the US will tighten technology transfer to China, and even limit interaction between their peoples.

The US has taken measures to restrict visas for Chinese students. The world can expect an intensifying diplomatic competition between the US and China in many regions, as well as an arms race.

Nonetheless, the trade ceasefire between the US and China, if it holds, will spare the world immediate repercussions. Between them, the world’s two largest economies have the power to shatter the world’s dreams of economic prosperity. Luckily, that worst-case scenario has been averted, at least for now.

Zhang Baohui is a professor of political science and director of the Centre for Asian Pacific Studies at Lingnan University in Hong Kong. He is the author of China’s Assertive Nuclear Posture: State Security in an Anarchic International Order