Donald Trump needs a trade deal, China not so much – but Beijing may just be ready to settle, too

It’s time to make a trade deal. For China, the trade dispute with the United States is an unnecessary distraction when Beijing is intent on realigning China’s economic model to a slower but more sustainable pace of expansion. As for the US, it may now be politically imperative for the Trump administration to cut a deal. 

A trade deal that satisfies both sides partly but neither side entirely surely cannot be beyond reach.

From China’s perspective, structural economic reform remains the main objective, and it is achievable with or without a resolution of the trade war. But fulfilling Chinese economic policy objectives without such a distraction is clearly going to be simpler than if the conflict rumbles on or worsens.

For China, resolving the trade dispute will remove an economic irritant. For the past few years, Beijing has consciously sought to deleverage the economy so as to reduce risks to financial stability, while seeking to move away from an investment- and export-led economic model to one dominated by domestic consumption. The intention has been to achieve a lower but more sustainable pace of growth.

In recent months, and surely not helped by the deterioration in China-US trade relations, Beijing has felt the need to unveil targeted measures to stimulate the economy, in the wake of lower economic growth, job losses and a drop in consumer confidence, evidenced in lower retail sales growth.

That doesn’t mean China’s pursuance of structural economic reform has ended. Instead, targeted economic stimulus should be seen as complementary to the original aims.

As for the distraction that is the US-China trade war, if it can now be resolved amicably, one source of concern about the prospects for the Chinese economy will be removed. It might also make it easier for China to achieve its wider economic policy goals.

The more that Beijing delivers on its aim of deleveraging the economy, the less the amount of domestic capital that the economy will be able to tap into to finance future growth. China is going to need more foreign capital and that is surely more likely to flow in if the trade war is settled in a mutually acceptable way.

Trade war or peace, China is seeking economic stability not growth

In a nutshell, while there is arguably no economic imperative for Beijing to end the dispute, it is an unwanted sideshow that is complicating, although not thwarting, the implementation of China’s structural economic reforms.

The timing of Vice-Premier Liu He’s visit to Washington on January 30-31 may be opportune. Ending the trade war now might be a political imperative for US President Donald Trump, who is now past the halfway stage of his current term in office and who will already be thinking about his re-election prospects in 2020.

With continuing political gridlock in Washington following last November’s midterm elections, a gridlock that will only complicate efforts to address the looming March 1 expiration of the current suspension on the US debt ceiling, the Trump administration might be minded to cut a deal with China.

Meanwhile, in a working paper published last week, the International Monetary Fund analysed data from 151 nations between 1963-2014 and concluded that tariffs are economically counterproductive and “have only small effects on the trade balance”.

China wants consumers to drive economy, but are they all spent?

It doesn’t even appear that it is China who is paying the tariffs. “Let me be very clear: tariffs are taxes paid by American families and American businesses – not by foreigners,” Thomas Donohue, president of the US Chamber of Commerce, asserted earlier this month.

With the 2020 US presidential election looming, the Trump team won’t welcome an idea taking root that it is the US electorate and US firms that are actually footing the tariff bill in the trade war.

That wouldn’t be a vote-winner. After all, as Trump’s own 1987 book The Art of the Deal says: “You can’t con people, at least not for long … If you don't deliver the goods, people will eventually catch on.”

A win-win zero-tariffs trade deal that Trump and Xi can shake on

China’s pursuit of structural economic reform doesn’t require a US-China trade deal to be successful, but a resolution of the conflict would make policy implementation easier. At the same time, Washington might well make the calculation that a deal needs to be made now.

The time is right for Beijing and Washington to do a deal on trade. Both sides should now deliver the goods.

Neal Kimberley is a commentator on macroeconomics and financial markets