This Trade War Has Barely Crawled Out Of The Trenches

The US and China both blinked during trade discussions in Washington last week. Each side made overtures to reduce tensions. But the business community must keep its eyes wide open and look beyond the hype as no difficult issues have been resolved. This trade war has barely crawled out of the trenches.

On October 11, two days of talks resulted in a handshake deal between President Trump and Chinese Vice-Premier Liu He, which amounted to an understanding that in the next few weeks the two parties would try to put together what is being called an “interim agreement.” This so-called “phase one” of a comprehensive agreement will be negotiated in upcoming weeks and signed by Presidents Xi and Trump in mid-November at the APEC meeting in Chile if all goes well.

 If that all sounds pretty wishy-washy, well, it is. In the absence of details on last week’s conversations, hyperbole from the White House has been bountiful. 

Trump has framed the agreement as “one of the biggest deals ever made — and unbelievable for technology, unbelievable for the banking industry and services, and for the farmers.” He told farmers via Twitter that his deal “is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country!” Trump also asserted that China had agreed to purchase $40 to $50 billion in US farm products in the next two years and suggested that US farmers buy more land and purchase more farm machinery to accommodate. China announced no numbers. China last year imported just over $9 billion in US agriculture commodities. 

What really happened is that both sides felt a need to bring down the boil of this roiling 18-month trade war. The US and Chinese economies are both feeling the pain and Presidents Trump and Xi are facing domestic political pressures to settle things down. 

The US was on the verge of increasing tariffs on $250 billion of US imports from China to 30% from 25%. That is off the table for now. But the previous tariffs on some $360 billion in Chinese imports remain in place, even though China has repeatedly said it will not negotiate a significant deal until all of the tariffs are removed.

While China was eager to reduce tensions, its leadership also appears to believe that time is on their side. They were very clear-eyed that Trump was desperate for a breakthrough in order to quell a jittery US stock market and create a bit of good news as he is besieged by an impeachment inquiry, sharp questions about his Syria turnabout, and economic troubles among the farmers and manufacturers in the Midwest whose votes he needs in 2020. Just days before the Chinese negotiators arrived, Trump signaled he was eager to reach a deal of some sort. “Doing it in sections and phases I think is, really, better,” Trump said, just a week after saying he would agree only to a big deal.  

Liu He brought with him a letter from Xi to Trump in which Xi highlighted “positive headway,” “goodwill” and “managing differences.” The only concrete issue Xi mentioned was agriculture. “Mr. President,” Xi wrote, “I attach great importance to your concerns on agriculture products.” The truth is that China needs American soybeans and pork right now as swine-flu has decimated Chinese hog production. The price of pork — China’s most important food staple— has skyrocketed, rising 47% in August, after rising 27% in July.  

The Chinese and American description of what emerged from the talks was less than consistent. The Chinese did not describe what took place as a “deal.” Instead the Ministry of Commerce only said that “substantial progress” had taken place and the two sides had “agreed to work together in the direction of a final agreement.” A Xinhua commentary said that the US and China had avoided heightening tensions though “many of the issues that follow are still full of uncertainty.” 

The US offered few details other than saying that in addition to committing to increased agriculture purchases, progress had been made on technology transfer, intellectual property, forex market transparency, and phytosanitary and biotechnology issues. There was no mention of the core structural issues related to Chinese industrial policies, market access limitations and subsidies for state enterprises that are at the heart of this trade dispute. The US said that there would be a “phase two” agreement that would tackle those issues.

As the second day of talks began, China added momentum to the discussions by announcing a clear timeline for the lifting of its ownership caps on foreign securities firms, futures companies and fund management companies starting next year. The policy is in part aimed at attracting more foreign capital into the Chinese markets at a time when China needs foreign capital to control its balance of payments. This comes as the White House and Congress are preparing policies to limit US portfolio flows into China. 

So what does this all add up to? As the election edges closer, the impeachment inquiry gets hotter, and the tariffs take an increased toll on the US economy and consumer pocketbooks, it seems that President Trump will be increasingly eager to make a deal and put this trade war behind him. At least that is China’s bet. China appears willing to drag its feet until a deal beneficial to China presents itself.