Pentagon and Treasury Department objections to proposed export controls indicate that the balance of power in the global chip industry has shifted towards China. Image: iStock

The US-China trade talks went from bad to worse with President Donald Trump’s announcement of an extra 10% tariff on $300 billion worth of Chinese imports beginning on September 1, followed by Beijing’s prompt response of devaluing its currency. .

The US continues to have ambitious goals concerning its trade relationship with China. Buoyed by a bipartisan agreement that the time has come for the US to crack down on perceived unfair trade practices by China, the Trump administration would like to see Beijing make progress on the enforcement of existing trade rules. It argues that Beijing, while using the World Trade Organization to further its interests, has not stuck by the international trade body’s rules and has been unfairly taking advantage of both the American market and the global trading system.

The Trump administration has also called for better protections on intellectual property, an end to the forced transfer of technology, reforms to state support for its national high-tech strategy as well as progress on non-tariff barriers and the trade deficit.

Significant reforms of this nature would be difficult for President Xi Jinping to implement logistically and politically over a short time frame without causing upheaval to the Chinese system and to appear to be bowing to foreign pressure. Not surprisingly, the Chinese have balked at this, opting to focus on direct trade issues and to push the long-term structural matters to be addressed down the road, perhaps in a series of separate summits in the coming years.

While Trump has stated that the Chinese need a trade deal because of the alleged damage to China’s economy from American tariffs – annualized economic growth slowed to 6.2% in the second quarter of 2019 – some economists argue that the reduced growth rate is within the government’s target range and that economic fundamentals remain stable.

Additionally, Beijing increasingly believes that the Chinese economy has staying power and that China will be well served by cultivating its domestic demand potential as a way to ride out the effects of the trade war.

Beijing increasingly believes that the Chinese economy has staying power and that China will be well served by cultivating its domestic demand potential as a way to ride out the effects of the trade war

Another factor at play is that China appears no longer to be seeking the approval or the acceptance of the Western rules-based order. It believes that China is well served by its indigenously created paradigm of authoritarian capitalism. With its Belt and Road infrastructure initiative involving more than 150 countries, China is playing the long game and believes it is creating a new economic model that can be an alternative to what it sees as an archaic US-led system.

Analysts increasingly assert that any forward momentum in trade talks will involve China agreeing to buy more agricultural products in return for the US holding back on imposing additional tariffs, removing some existing tariffs and easing some of the restrictions on select Chinese firms such as the telecoms giant Huawei.

Yet it may be that we have come to a point where a future US-China trade deal will not return their commercial and trading relationship to the vigorous level of the past 25+ years. Amid the current trade war, confidence among investors has eroded, hearts have hardened and supply chains have been rerouted, making a return to the prior era of energetic trading unlikely for the time being.

At the same time, if a trade agreement is not reached there will not likely be a marked difference in the current arrangement of tariffs being imposed on both countries. A possible benefit to this arrangement is that markets now have experience operating amid the trade war and have factored this new reality into their decision making and operations, possibly limiting and containing the risk of economic fallout.

A lack of resolution to the trade war could become another policy area where Washington and Beijing agree to disagree, similar to the differences over far-ranging topics like Taiwan, the Dalai Lama, the South China Sea, democracy and human rights, cyber and intellectual-property theft, information warfare, North Korea, election meddling, currency manipulation and military spending, among other areas.

The hope is that Washington and Beijing will maintain forward thinking and look for ways to collaborate as the two countries approach the next chapter of the US-China relationship. For the sake of the stability of the Indo-Pacific region, both sides must explore areas of common interest where they can work together, that is, science, medical research, the environment and even some carefully targeted areas in the geopolitical and security spheres, such as anti-piracy, anti-terror, joint crisis planning on the Korean Peninsula and nuclear non-proliferation.

Perhaps the silver lining in the protracted US-China trade war is a commitment by both countries, when necessary, to muddle through and proceed with improvisation to resolve differences in various policy areas. Washington and Beijing, while acknowledging disagreements over core interests and values, have an obligation to find ways of collaborating in key areas amid their growing rivalry and competing political-economic models.

Also read: US using ‘dirty tactics’ in trade war

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