Both sides recognize that they are each holding an economic gun to the other’s head. Hence, despite the political posturing, both Trump and Xi ultimately want a deal. In any case, both sides recognize that they are each holding an economic gun to the other’s head. Hence, despite the political posturing, both Trump and Xi ultimately want a deal. Moreover, they need it to happen by the end of the year to prevent further damage from big tariff hikes currently scheduled to take effect on December 15. That timeline requires that both sides start taking symbolic and substantive steps immediately. As a first step, China should propose an agreement using the same text as the previous 150-page draft, but with revisions to satisfy its three “red lines.” Specifically, China should remove the U.S. provisions for retaining tariffs after the agreement is signed, and for unilaterally re-imposing tariffs if the U.S. concludes that China is not honoring the agreement. And it should add a commitment that China will execute the agreement in a way that is “consistent with its constitutional, legislative, and regulatory processes.” Second, China should improve its original offer of a $200 billion reduction in the bilateral trade deficit over time . This negotiating point is based on lousy economics, but it is important to Trump personally and politically.
and five other Chinese tech companies, China’s poetically titled
“unreliable entities list” threatens to target
U.S. firms for exclusion. Given these developments, why should anyone expect the next round of talks to succeed? For starters, the U.S. and Chinese economies are both in trouble. In the U.S., recent poor manufacturing and private-sector employment figures have reinforced pessimism about the economy’s prospects. If conditions were to deteriorate further, Trump’s bid for re-election in November 2020 would be endangered. Likewise, Xi would be weakened by any significant slowdown on the eve of the Communist Party of China’s centenary celebrations in 2021, which will be a prelude to his bid for an already controversial third term starting in 2022. Each side says publicly that the trade war is hurting the other side more. But, of course, it is hurting both by destabilizing markets, destroying business confidence, and undermining growth. Each side also claims to have the economic resilience needed to ride out an extended conflict. On this question, it is unclear who has the stronger argument. America is certainly less trade-dependent than China; but China, though weakened by poor domestic policy choices enacted before the trade war, still has stronger fiscal, monetary, and credit tools at its disposal.
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October 2019
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