China-US Trade War: More of the same; after the temporary truce

Three months ago, while appraising the ongoing China-US trade war, an important assertion that I had made was that the trade conflict was just a partial manifestation of the Greater Institutional Conflict between the two nations, where any cooperation between them is likely to remain conditional, with rivalry remaining the norm.

In that context, where do we stand in the light of the recently concluded trade talks between Chinese Vice Premier Liu He and US Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin, and the one expected to commence again, between the same two interlocutors, next week?

The short conclusion would be that in this round of negotiations perhaps China has given away more than it has received, as its relatively weaker economic position at the start of the talks left it with precious little space to maneuver.

One is inclined to agree with US President Donald Trump of the “tremendous progress” that the US has made in the deal – getting substantial concessions from China, while at the same time making no commitments to ease its impending additional import tariff hike on $ 200 billion worth of Chinese imports (from 10 percent to 25 percent) from March 1. The Chinese have also agreed to buy more from US producers, including soybeans, high-end manufactured and industrial goods, and financial services.

First, China had little negotiating room to begin with, given that the meeting came on the heels of a 4Q 2018 GDP report that showed the economic growth having slowed down to 6.6 percent y-o-y, the slowest in 28 years. The bite of tariffs and non-tariff barriers for Chinese firms to operate in the US has already exacerbated the pain that the firms had been facing due to a government orchestrated deleveraging since 2017- which has forced unproductive firms to cut debt or close down in order to maintain financial sustainability. Any belligerence could have led to an escalation of trade sanctions by the US, either in terms of tariffs or the scope of industries covered under it. By being somewhat amenable, Chinese negotiators perhaps bought their time to come to the table again later this year, when the domestic economy may look somewhat healthier, not least due to income tax cuts and other consumption subsidies announced by the government at the beginning of this year.

Furthermore, China’s approach to the trade talks has been to preserve a semblance of a dignified truce, and wait for an opportune moment so that the current political establishment can claim some credit before the China’s legislature (National People’s Congress) meets for its annual session in mid-March. In that sense, Chinese political analysts consider the biggest takeaway from the talks to be a commitment from President Trump for a follow-up summit between him and President Xi Jinping. However, as the latest comments from the White House tell us, no talks between the Heads of State are likely to take place before the March 1 deadline for the escalation of tariffs on the US imports of Chinese goods. I believe that the closer the meeting moves to the mid-March legislative session in China, the more intransigent China is likely to be in its demands- as its government officials would prefer to “save some face” before they face the Communist Party rank and file in the People’s Hall. On its part, by appearing to be a reasonable party in the discussions and by acceding to some of US’s demands in the first round of trade talks, China would expect some concessions from US – preferably that they desists from further prosecutions of Chinese national champions like Huawei. Notably, since these talks are likely to be personally led by President Xi, he will have the opportunity to claim any dividends as a personal victory, and therefore burnish his reputation further in the Communist Party.

Finally, even in the latest round of trade talks, China has attached an unsaid conditionality to the access it is allowing to the US firms. For instance, while the Chinese policymakers agreed to buy more of US financial services and high end manufactured and industrial products, there seems to be an ambiguity about dismantling the barriers that have hobbled the international firms from having an equal access to the China’s local market in the first place.

Most importantly, the stipulations that require foreign companies to share technology and business practices with local players through a joint venture remain in place; eventually allowing the local firms to emerge as potential rivals to them. Therefore, the fine print could potentially mean that while Chinese authorities will probably allow a discretionary access to US firms for the time-being, the institutional framework regulating the foreign firms’ operation in China will still remain untouchable on the negotiation table, unless US also agrees to make some bold concessions in its demands from China, and/or reins in its attempts to isolate China globally.