Confusion and Uncertainty Cloud US-China Trade Truce
US President Donald Trump and Chinese President Xi Jinping. (Photo: Reuters)
By Anita Inder Singh

Confusion and Uncertainty Cloud US-China Trade Truce

Jul. 11, 2019  |     |  0 comments

US President Donald Trump called a truce to the US-China trade and technology war at the G-20 summit which was held in Osaka from 28 to 29 June, 2019. He said that the US would not impose new tariffs on about USD 300 billion worth of Chinese imports and would allow American firms to sell products and services to the Chinese telecom giant, Huawei. But details of what else was agreed between Trump and Chinese President Xi Jinping on the sidelines of the summit are unclear.

The trade cease-fire is already looking uncertain and confused. The uncertainty is an awkward reminder of the failure of the previous truce, on which Trump and Xi agreed at the G-20 meeting in Buenos Aires in December 2018. How long the current truce will last is anyone’s guess.

The trade war has been dominated by two issues. First, the US has tried to reduce its trade deficit with China by imposing tariffs on Chinese imports. Since March 2018, Washington has applied tariffs on USD 250 billion of Chinese imports. All told, Washington’s tariffs cover roughly half of what the US buys from China. Beijing has retaliated with tariffs on American exports to China.

Second, Washington wants to end what it alleges is China’s theft of intellectual property, especially as illustrated by the purchase of American technology by the Chinese telecom giant, Huawei. Washington wants to stop China from acquiring American hi-tech.

Concern about China’s plans to dominate key areas of emerging technology — ranging from artificial intelligence to biotechnology and electric vehicles — prompted the US to stop China from gaining access to American technology. So far, there have been no deals on the main issue of the technology dispute: US pressure on Beijing to roll back its plans for state-led creation of global competitors of hi-tech. Each country believes that technological superiority is essential for its global economic and military primacy. The US sees China as the main challenger to its international ascendancy.

The US-China resumption of talks at Osaka does not necessarily signal any trade agreement.  The differences between them could yet throw a spanner in the works. In fact, Trump’s initial announcement about Huawei has been overtaken by one from the US Commerce department saying that Huawei remains on the blacklist.

In 2017, American farm exports to China amounted to some USD 15.9 billion; in 2018 they fell to USD 5.9 billion. As a gesture of good will, China initially announced that it would resume the purchase of some American farm products, including corn, pork and soybeans. But after the US Commerce Department’s announcement, China has announced that existing US tariffs must be removed if there is to be a trade deal.

China may be trying to get a comeuppance because of the continuing blacklisting of Huawei. But both the US and China are adding to the uncertainty and confusion about the trade war and its global impact.

The US decision to retain existing tariffs has led China to complain that the US is not treating it as an equal. In that case, it might not buy American agricultural  products. Much will also hinge on how Washington handles the ban on sales of American component parts to Huawei.

Even the short lull in the trade war is already showing up long-term implications. It is understandable that China should want current US tariffs to be removed. For, if the US retains duties on Chinese goods for several months or years, China’s economy would suffer. Global firms, manufacturing everything from shoes, clothes and furniture to electronics, have already responded to disrupted trade by moving their supply chains out of China. Intel, Samsung, LG, and the Singapore-based computer manufacturer Lock PC Group recently announced that they were moving operations from China into Vietnam, Thailand, Malaysia and Indonesia. India is also trying to attract foreign companies wishing to leave China.

To crown it all, the public politicization of the trade war by the US and China will make it hard for both Trump and Xi to climb down from their positions and to reach a face-saving compromise.

Beijing’s long-term worry is whether the shift in international business away from China could be irreversible.

The US and China are dealing with each other at cross purposes. Despite the uncertainty, China may yield nothing. Washington demands radical changes in China’s economic policy, especially an end to the government subsidies for local companies that compete with their American rivals.

Beijing wants Washington to end tariffs on all its exports to the US. But China has refused to abolish or radically transform an economic model based on industrial subsidies and state-owned companies that it claims have lifted millions of people out of poverty since the 1980s.

Trump must therefore decide whether to end the trade war or to allow the US and Chinese economies to move further apart and trigger more economic uncertainty worldwide.

The standoff between the US and China over Huawei also continues. Washington is pushing hard to prevent it from becoming the backbone of the future internet. But Trump’s initial remarks suggest that he may have been using Huawei as a major lever to force China to accept his terms on trade issues. On May 15, Trump cited national security issues to justify an executive order that would prevent American companies from using Huawei equipment in their networks. Beijing holds that US actions like placing Huawei on the “Entity List” (banning it from buying components from US companies without official approval) exposed Washington’s intention to wound China’s economy.

The international spotlight is on Washington’s tough stance on Huawei. Initially the US alleged that Huawei was a potential security threat. Huawei denied the charge. The blacklisting by the Trump administration did affect Huawei, which was buying USD 11 billion worth of equipment annually from US companies. It has been able to secure its chip supply from some non-American companies but cannot replace all the components supplied by US firms.

When Trump announced that American companies would be allowed greater leeway in selling their products to Huawei, he explained that he had taken the step to ease the ban at the request of “our High Tech companies.” He was probably responding to the case made by the American technology industry that it should be able to sell products to Huawei that do not pose a threat to national security.

But the latest American and Chinese announcements leave the Huawei issue and the truce up in the air.

Meanwhile, the trade war with China has not reduced the US trade deficit or brought manufacturing jobs back home. Chinese exports to the US have actually increased over the last year. The US imported a record USD 539.5 billion in goods from China in 2018.

Other countries have gained from the fall in US farm exports to China. Soybeans were America’s largest agricultural export to China. In 2018, however, US soybean exports to China fell by 49 percent; 75 percent of China’s soybean imports came from Brazil.

Overall, between October 2018 and March 2019, exports from the US to China dropped by 26 percent, compared to a year earlier. Imports from China declined as well. The American exports ranged from lobsters to cars and oil.

It is unlikely that US pressure can change what Washington perceives as China’s unfair trade practices. Cooperation with America’s European allies and Japan is proving elusive because they disagree with Washington about the extent of the threat from Chinese practices and the security threat posed by Huawei’s 5G technology.

To crown it all, the public politicization of the trade war by the US and China will make it hard for both Trump and Xi to climb down from their positions and to reach a face-saving compromise. The persistence of the US-China trade impasse threatens world economic growth. What happens next to the US-China truce is very hazy.

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