Following the trade truce brokered by President Xi Jinping and President Donald Trump on June 29 in Osaka, negotiators from China and the US are reported to be on the path to resuming trade talks. It is a welcome development. However, one key question remains: are we seeing the light of normalized trade relations at the end of the tunnel?
Both the US and China have incentives to end the trade war sooner rather than later. Trump faces mounting pressure as the US general election fast approaches. US businesses and consumers alike, who are being forced to pay for his trade war, are increasingly dismayed and demand a quick solution to the now year-long conflict. Despite his claim that he is “not rushed,” Trump’s anxiety to secure a trade deal was revealed by his initiative to meet with the Chinese president at the G20 summit. China, seeing no benefit in prolonging the tension, would be quite relieved and prepared to terminate once for all the trade spat exerting downward pressure on its already slowing economy.
However, the two nations differ in their desired outcome for the final agreement emerging from the negotiations. Washington demands a “fair deal” --a lopsided agreement in the US’s favor that is both “historical” and not limited to trade. The US aims not just to substantially reduce its trade deficit with China, but, more importantly, to rebalance its relations with the world’s second largest economy. To this end, Washington is trying to change China’s economic behaviors. Its negotiating demands, which are, in the words of chief economics commentator at the Financial Times Martin Wolf, “too humiliating for China to accept.” In China, these demands are increasingly seen as an attempt by the US to deprive the nation of its right to development.
China seeks a balanced agreement that serves the interests of both countries. Although it is prepared to make concessions, it maintains that principles are not to be compromised. The Trump administration’s ambitions will thus bring about direct confrontation with its counterpart. The difficult-to-reconcile differences in objectives will inevitably lead to clashes in the renewed negotiations.
Moreover, it is apparent that Beijing and Washington do not see eye to eye on the basis of their restarted talks. Washington is pushing the idea that the talk should pick up where it left off in early May when, in its view, consensus had been reached on 90% of the draft agreement. The Chinese side, however, does not seem to share this assessment. Rather, it has voiced serious concerns in three major areas: the existing tariffs, the scale of China’s purchases of US goods, and a balanced text of the agreement. China has also named the removal of all the existing tariffs as a condition for a trade deal, a demand that the US has so far adamantly opposed.
Apparently, in some important areas, what Washington sees as a done deal is, in the eyes of Beijing, subject to further negotiations. It would, therefore, take some time for the parties to work out what has been agreed and what has not. One outcome of the pre-talk bargain would, I suspect, be that the negotiators would have a much bigger job than the 10% of the text claimed by Washington.
Furthermore, developments since May have changed the landscape of the economic relations between the two nations in no mean measure. The hiking of tariffs on $200 billion worthy Chinese goods from 10% to 25%, and the blacklisting of Huawei and five Chinese super-computer companies have inflamed the trade tensions between the countries and increased the complexity of the talk. By hardening China’s position, these events have made it difficult to simply return to the early May text.
At the end of June, Wang Shouwen, a senior Chinese negotiator, highlighted another critical barrier to a swift trade talk conclusion when he said that the agreement struck by China and the US should conform to the World Trade Organization rules. Yang Guohua, a WTO law professor at Tsinghua University in Beijing, notes that several US demands risk contravening WTO rules. First, demands that China purchase US products violate the most-favored nations principle and the quantity restriction stipulation laid out in the General Agreement on Tariffs and Trade. In addition, they violate the rule concerning the ban on orderly market arrangement stated in the Agreement on Safeguard. Second, Washington’s insistence on keeping existing tariffs does not conform to the rule governing the commitment on tariffs in the General Agreement on Tariffs and Trade or to the rules concerning the settlement of disputes through the WTO as provided in the Dispute Settlement Understanding. While these views do not necessarily reflect China’s stance, Chinese negotiators are expected to be steadfast in bringing the trade agreement in line with the WTO rules.
China is likely to be seen as safeguarding the rules of the multilateral trading system, which will win the support of most WTO members including EU, Japan and Canada. But its stance will also complicate hopes of reaching an early deal as special arrangements in market access and an “enforcement mechanism” are two key US demands. In previous rounds, negotiators from the two countries wrangled over them long and hard. It is inconceivable for the US to anticipate anything but fierce fights in future negotiations.
Given all this complexity, it would be reasonable to conclude that a swift agreement will remain elusive and that the renewed negotiations will be grueling.
Nevertheless, one hopes that the parties will find a solution to their trade issues -- if Washington keeps a lid on its ambitions. The possibility of the US softening its stance cannot be ruled out. After all, prolonging the trade war will inflict more pain on the US as well. Trade frictions, as difficult as they are, could be the least intractable among a host of other issues such as technology, security, the South China Sea, and Taiwan. However, for the time being -- and likely for some time to come -- the light at the end of the tunnel is still shrouded by fog and seems some distance away.
