The apparent truce between Washington and Beijing agreed on October 11 in the Oval Office remains sketchy in details but has allowed both sides to claim modest victories. The Chinese argue they did not commit to core structural reforms on issues like state subsidies and forced technology transfer. The US highlights the Chinese offer to purchase massive amounts of agricultural commodities, its forbearance on currency manipulation, and vague assurances about better protection of Intellectual Property (IPR) and better access to financial services markets in China. The US also pulled back on raising existing tariffs from 25% to 30%, scheduled for October 15. The biggest winner in the near term will be global financial markets as the uncertainty associated with the almost daily vicissitudes of the trade battle will abate for the next few months.
From a US perspective, the reality is that President Trump gave up little in return for some politically important help on the agricultural sector, an important constituency going into the election year. The US also did not give ground on the sensitive national security issues headlined by the Huawei case. The agreement, as Trump admitted in the Oval Office scrum, does not solve the underlying issues of IPR protection, forced technology transfer, state subsidies, and reciprocal access to Chinese markets.
Nonetheless, no existing tariffs were rolled back by the US side, leaving nearly two-thirds of Chinese exports to the US burdened by significant tariffs. The impact of these tariffs, along with reduced investment and a global slowdown in growth, which are all affected by the tariffs, is having a measurable impact on the Chinese economy. On October 14, new data for September revealed a reduction of 22% in Chinese exports to the US, following on a 16% reduction in August. Worldwide exports for China declined 3.2% in September. National security related US technology exports to China are also harming the production of 5G equipment by Huawei and ZTE, as well as other Chinese technology firms. China’s third quarter GDP growth slowed to the weakest rate since records began in 1992.
The cumulative slowdown in the Chinese economy, along with political unrest in Hong Kong and internally, has resulted in a fierce internal debate among Chinese leadership on the effectiveness of Xi’s aggressive approach to economic and political pressures, and helps explain the trade truce. If China tries to renegotiate the admittedly vague terms of the October 11 accord, they will face the possibility of a new round of US tariffs in December. To avoid this they are likely to largely abide by the terms as outlined in the agreement.
China also understands that in the vituperative political environment in Washington there is a competition to see which party can be more intransigent on China. While retweeting a Politico article on U.S.-China trade on October 11, Senator Chuck Schumer (@SenSchumer) noted “A China mini deal? It must not include concessions on Huawei. That’s what China wants most, and it would show tremendous weakness.”
The more difficult questions are whether the truce will extend beyond the Trump-Xi signing in November and whether the US can achieve its objective of convincing China that structural reform is in its long-term interest. Much will depend on the willingness of Trump to keep the economic sanctions and tariffs in place – and possibly expand them in December – nas we enter the 2020 election year. The US economy is weakening, in measures of job gains, investment and investor confidence, but it is not in recession and probably will not be unless the trade war is seriously expanded, including with Europe as explained below. It also depends on how much the Chinese economy is decelerating, and thus putting additional pressure on President Xi to settle the US disputes. There are signs that capital is again moving out of China and that efforts to reflate its economy are compromised by debt levels and a weakening yuan. But the real state of the Chinese economy cannot be known because of opaque and often misleading data and reporting from the Middle Kingdom.
Another major factor in the equation is the position of Europe. Many analysts in the US, myself included, have argued that a US-EU understanding on the China threat (both economically and politically) is a key to inducing serious economic reform and better compliance with WTO commitments by China. The EU trade deficit with China continues to grow, reaching 185 billion euro last year, and the EU economy is clearly weakening, partly due to the trade problems and concomitant growth in uncertainty. The German economy is in recession and leading pillars of its economic model are under threat from Chinese industrial policy. Germany’s trade deficit with China rose from $14 to $16 billion between 2017 and 2018. WTO reform, including measures to address the Chinese threat from industrial subsidies and IPR theft are also badly needed, suggesting again that the traditional US-EU cooperation should continue and lead the reform effort.
President Trump has certainly done his part to discourage meaningful cooperation with the EU, starting early in his term with steel and aluminum tariffs, and other provocations such as the threat of national security-based tariffs on the auto sector. But it is also becoming increasingly clear that the EU is going down a different path in economic and national security policy from the liberal consensus of the immediate post-Soviet era. Recent EU planning documents preparing the Von der Leyen presidency are also decidedly hostile to US interests.
Thinking about funding (i.e. subsidizing) putative national champions in manufacturing technology such as telecommunications and cloud computing, and new antitrust aggressiveness and tax policy appear more intended to counter US economic interests than those of China. WTO reform on state owned enterprises and digital commerce is all but impossible unless the US and EU positions are better aligned. The initial EU response to WTO-sanctioned US retaliation for Airbus subsidies, at least as preliminary reports suggest, would clearly skirt around any “rules based,” WTO compatible response. Finally, Chancellor Merkel, joining other EU member states, is allowing Huawei equipment, with few restraints, to be deployed in Germany’s nascent 5G networks. US officials have warned Germany that this step would result in severe cutbacks in intelligence sharing with the US due to apprehensions about the security of the networks. Merkel apparently considers China a better business opportunity in the long run than the US, with whom Germany enjoyed a $68 billion surplus in merchandise trade last year.
The Chancellor and all Europeans might want to study closely the heavy-handed way China is treating the executives at US firms who have supported Hong Kong democracy advocates. And how China is using the big data it unabashedly conscripts from its own citizens and from users of Chinese digital commerce and communications systems built and operated by Chinese firms. There is good reason for Hong Kong protestors to wear masks to defend against Beijing’s advanced facial recognition technology.
One hopes that cooler minds prevail on both sides of the Atlantic to advance a constructive approach to Chinese practices and to WTO reform, but the chances at this time are dim, unless the Chinese economy is much weaker than reported. So we are today looking at longer-term uncertainty and tensions in the US-China disputes, which will exacerbate the US-EU relationship in their wake.
Read in Aspenia Online