China and the US have perhaps their last chance to end the trade war. Otherwise, get ready for global economic turmoil
- Both countries claim the other is hurting more, but both clearly have an interest in ending the trade war by 2020. If they fail, nationalist sentiment may make a resolution impossible, which would have stark consequences for everyone
Now that the celebrations marking the 70th anniversary of the founding of the People’s Republic of China are over, it is time to direct attention back to the Sino-American trade war. That conflict may well be about to enter its endgame.
Indeed, the next round of negotiations could be the last real chance to find a way through the trade, technology and wider economic imbroglio that has been engulfing both countries.
Phase three could best be described as the “summer of our discontent”: the United States imposed a fresh round of import tariffs, and China retaliated in kind, while also unveiling its answer to the US “entity list”.
Given these developments, why should anyone expect the next round of talks to succeed?
US-China trade talks are about so much more. That’s why they will fail
Likewise, Xi would be weakened by any significant slowdown on the eve of the Communist Party of China’s centenary celebrations in 2021, which will be a prelude to his bid for an already controversial third term starting in 2022.
Each side says publicly that the trade war is hurting the other side more. But, of course, it is hurting both, by destabilising markets, destroying business confidence and undermining growth.
America is certainly less trade-dependent than China; but China, though weakened by poor domestic policy choices enacted before the trade war, still has stronger fiscal, monetary and credit tools at its disposal.
In any case, both sides recognise that they are each holding an economic gun to the other’s head. Hence, despite the political posturing, both Trump and Xi ultimately want a deal.
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As a first step, China should propose an agreement using the same text as the previous 150-page draft, but with revisions to satisfy its three “red lines”. Specifically, China should remove the US provisions for retaining tariffs after the agreement is signed, and for unilaterally reimposing tariffs if the US concludes that China is not honouring the agreement.
And it should add a commitment that China will execute the agreement in a way that is “consistent with its constitutional, legislative and regulatory processes”.
Second, China should improve its original offer of a US$200 billion reduction in the bilateral trade deficit over time. This negotiating point is based on lousy economics, but it is important to Trump personally and politically.
Trump boast ignores reality of trade war as US farmers feel pain
Moreover, it may be possible to have each country declare its position on state industrial policy in the official communique accompanying the signing of the agreement. Such a statement could even specify the domestic and international arbitration mechanisms that will be used to enforce all relevant laws on competitive neutrality.
The US, meanwhile, has already deferred a 5 per cent tariff hike that was originally scheduled for October 1. It could also issue exemptions for some US firms to sell non-sensitive inputs to Huawei.
Action over Huawei set to haunt Trump
I am one of the few commentators who have argued all year that, despite the political fireworks, Trump and Xi’s underlying interests make a deal more likely than not. But the recently announced impeachment proceedings against Trump could throw a wrench into this process.
Both sides have already spent much time preparing a Plan B for 2020: to let loose the dogs of economic war, foment nationalist sentiment, and blame the other side for the ensuing damage. Should that happen, the risk of recession in the US, Europe and Australia next year will be high, though China would seek to soften the domestic blow through further fiscal and monetary stimulus.
The choice now facing the US and China is stark. For the rest of the world, the stakes could not be higher.
Kevin Rudd, a former prime minister of Australia, is president of the Asia Society Policy Institute in New York. This commentary is based on a recent address to the US Chamber of Commerce in Beijing. Copyright: Project Syndicate