Hold the champagne, Mr Trump. China isn’t about to give the US a preferential trade deal

Seven months ago, as the United States’ tariff war on China began to bite and trade negotiations began to get serious, I crafted a memo advising Xi Jinping on his best negotiating strategy. As we are now on the brink of what Donald Trump will inevitably boast is the best US trade deal ever, I face a moment of truth: did Chinese negotiators heed my advice? Will the world trading economy emerge in a better place? Will the pain and cost of the tariff war have been justified?

In short, my note told Xi in no circumstances to bend to pressure from US negotiators demanding a unilateral deal for the benefit of US exporters. Instead, Beijing should acknowledge the need for wide-ranging reforms, keep lines open with other major trading partners, and make sure any deal offered to the US can quickly be multilateralised.

My biases still make me wish for a wholesale rejection of Trump’s “America first” unilateralism, with international trade built around bilateral agreements and disputes settled in everyone’s domestic courts. That would be a world that might benefit the US as the playground bully, but could benefit no one else. It would destabilise seven decades of compromise in robust multilateral institutions, and undermine the prosperity and stability we have known most of our lifetimes.

Xi and his trade team have for the past two years pinned their rhetoric firmly to the mast of multilateralism. When it comes to the crunch, will they stand fast, or bow to relentless pressure to cut a preferential deal for US exporters?

Interpreting the results of the deal will be complicated by the fact that by October last year, the trade negotiations had clearly split into two. The earlier negotiations followed Trump’s original tariff war agenda, focusing on the merchandise trade balance and seeking to open China’s market to more US exports – farm goods, natural gas, Boeing aircraft and so on. When Trump claimed that trade wars “are good, and easy to win”, this is what he was talking about. So, too, when he talked with breathtaking naivety of tariffs as “the greatest negotiating tool in the history of our country”.

The latter negotiations began in the shadows, focused initially on an attack on China’s economic structure – from its state-owned enterprises to its “Made in China 2025” industry policy and its strategic use of subsidies. It quickly developed into an unapologetic effort to clip the wings of an economy that was growing too far too fast for the comfort of a nation that had for the past 70 years assumed unchallenged technology leadership. It had almost nothing to do with tariffs or trade balances.

Needless to say, the deal that will be proclaimed in coming weeks will deal only with the tariff war agenda (with perhaps a few concessions on structural change). The latter negotiations are only just warming up, and the issues are existential and may take years to resolve. Herein lies the Thucydides Trap.

Even for the simpler tariff-focused deal, it is open to question whether anyone will be able to credibly boast about benefits. Since the trade war began, the monthly US trade deficit with China has remained mostly in the US$30 billion to US$40 billion range. In a report headlined “Trade Works. Tariffs Don’t”, the US Chamber of Commerce website warns: “American businesses and consumers are bearing the brunt of the emerging global trade war.”

Economists at the New York Federal Reserve, Columbia University and Princeton University concur in a recent report that “the costs of the trade war are quite large relative to optimistic estimates of any gains that are likely to be achieved”.

The report calculates that the trade tariffs are costing US consumers and companies US$3 billion a month in tax costs and US$1.4 billion a month in “deadweight welfare (efficiency) losses”. It says about US$165 billion in trade a year has been diverted from the US, possibly incurring large costs to reorganise supply chains. It finds that prices of tariff-impacted goods have increased between 10 and 30 per cent, and that almost all of the costs of the trade war are being borne by US consumers and companies. According to another study by Columbia and other universities, the main victims are farmers and blue-collar workers – Trump’s core supporters.

At the same time, Chinese investment in the US has crashed – from US$55 billion in 2016 to US$3 billion last year, according to the research firm Mergermarket. The Institute of International Finance calculates that Chinese tariff retaliation has cost the US around US$40 billion a year in lost exports. Whatever Trump’s claims about trade wars, the results will be messy and the gains hard to identify.

Perhaps more important will be whether China manages to remain steadfast in its defence of multilateralism. Throughout the negotiations, Xi and his team have fanned out assiduously to calm other trading partners.

Remember the massive Shanghai import fair last November (which will return this autumn)? There have also been frequent trade discussions with Japan, which is also the de facto leader of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Europe’s leading economies have been wooed – most recently in trade talks in Brussels last month that promised to conclude the long-awaited EU-China Comprehensive Investment Agreement in 2020.

China’s Belt and Road Forum in Beijing two weeks ago also made clear to the 37 leaders in attendance that China is committed to openness and multilateralism.

Put these activities together and it is difficult to see China cutting a deal with the US that will not be extended multilaterally to other trading partners. As Changyong Rhee, Asia-Pacific director of the International Monetary Fund, noted last month: “If the deal involved preferential access for the US to Chinese markets, this could lead to broader worries about the future of the multilateral trading system.”

The announcement of a deal will undoubtedly trigger celebration, and probably a relief rally in the equity markets. But will it truly be a cause for celebration? The rude reality is that US-China relations have taken an ominous turn that an end to the tariff war will not reverse.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view