Having made some breakthroughs, high-level trade negotiations ended in Washington this week with a pledge by the US and China that they would not launch a trade war against each other. This was followed up by a significant announcement that tariffs would not be imposed because both sides had reached agreements on economic and trade issues.
Even as the world was hailing the end of the imminent trade war threat, the situation on the ground changed very rapidly after the talks were over. US President Donald Trump announced that the deal would need “a different structure.” Apparently, he may have buckled to pressure at home from dissatisfied hardliners that would like to drive a tough bargain before closing the deal and object to any concessions that were decided upon.
Since this latest announcement, US stocks have fallen and all the optimism generated over the weekend has deflated. Even though tensions have eased, the situation is full of uncertainty. In fact, the tussle and disagreements among the US trade team had started becoming public soon after Treasury Secretary Steven Mnuchin announced that the tariffs were put “on hold.” In contradiction, US trade representative, Robert Lighthizer had burst out that, “the US may use all of its legal tools to protect our technology through tariffs.” There seem to be two camps among the negotiators of the deal from the American side and the hawks seem to be in larger numbers than the doves.
At the back of it all, it is the US-China trade deficit that is driving negotiators from both sides up the wall
At the back of it all, it is the US-China trade deficit that is driving negotiators from both sides up the wall. Having been in choppy waters over bridging the huge deficit surplus, the US and China have to find a way to bring down the trade margin. Reducing the trade surplus would be relatively easier if the US had opened its domestic market and allowed for more varied exports.
Restricting exports results in an unbalanced bilateral trade system has allowed the US trade deficit to pile up to the sum of $375.2 billion in 2017, which is nearly half of its global trade deficit. In order to reduce the prevailing trade deficit, it is the US market which would have to be opened up to facilitate manufactured goods and services trade.
But “opening up the market” is not as easy as it seems; one of the main reasons the US market is being denied to China is to prevent any leakage of know-how to the rival power, which is still somewhat dependent on foreign technology. Though China is investing a lot and aims to be a global leader in AI research and development, it needs more time to get there. In fact, the trade war scenario is building up because the US has become more protective about its AI technology after China announced its “Made in China 2025” plan. Consequently, new tariffs were imposed on specific sectors and companies to slow down China’s ambition to lead in hi-tech. Notwithstanding these sensitive matters, Mnuchin played a productive role by suggesting the rules be relaxed for the time being to stave off an economic war.
Though it may take more time before the US and China find common ground, it is encouraging that talks were held. Made possible by the existence of a regular dialogue mechanism established after the US-China presidential talks in April 2017, four separate channels of communication are in place and these talks were held under one of the channels, the China-US Comprehensive Economic Dialogue. Negotiations help work out differences and it is the existence of such modalities that has just helped avert a trade war.
In the coming days, more tangible progress will be determined after US Commerce Secretary Wilbur Ross completes his visit to China next week. Expected to negotiate a proper framework that materializes in binding agreements between companies, it remains to be seen where US and China stand after putting things on paper.
No matter where this ends, the US-China bilateral relationship remains the most important equation in the world and any friction between the two has potential to send shockwaves throughout the world. Amicable terms between both nations is good news not just for them but also for the rest of the world.
Whatever happens, the doors of communication should not be closed and a state of limbo should be avoided. Dialogue resolves issues no matter how complicated. As Vice-Premier Liu He observed, “We must look at them calmly, maintain dialogue and properly handle them.” Always perceived as co-dependent economic powers, this latest dialogue has once again highlighted the necessity of continuing communication between China and the US to overcome hurdles instead of sabre-rattling.