snapshots

Mar 4, 2019 | 21:48 GMT

5 mins read

China, U.S.: A Trade Agreement, Albeit Limited, Appears Near

(Stratfor)
The Big Picture

Nearly a year after China and the United States began engaging in a trade war with global repercussions, several rounds of negotiations to settle the dispute have followed. The most recent set of talks appear to have inched closer to a deal in which both countries would lower some of the tariffs they have each placed on the other's imports. The deal, however, will likely represent only a partial settlement of their differences, with a number of issues continuing to divide them. Until the unresolved points are settled, the United States will likely continue to push China, using pressure points that go beyond tariffs.

What Happened

Roughly 10 months have passed since the United States and China began a trade war that has unsettled the world's economy. And now, the two powers are reportedly in the final stages of cementing a trade deal that would halt their tit-for-tat applications of tariffs on one another's imports. Negotiations are apparently on track to produce the outlines of a deal ahead of a leadership summit reportedly scheduled before the end of the month between the countries' presidents, Donald Trump and Xi Jinping. Among the stipulations of the deal include an agreement by China to increase its imports of U.S. goods, including $18 billion in natural gas. In another concession, China reportedly agreed to lower tariffs on U.S.-manufactured vehicles from their current 15 percent —  a move that would likely apply to all members of the World Trade Organization (WTO) under most-favored-nation terms. China would also lower tariffs on U.S. chemical and agricultural goods and advance the timetable for easing foreign ownership limitations on joint ventures in the automotive sector. Washington, for its part, could remove at least a portion of the tariffs it has levied against some $250 billion of Chinese products.

But the agreement will not end negotiations between the parties. U.S. demands for reform of China's industrial policies and the reduction of subsidies China grants to state-owned enterprises, plus the development of mutually acceptable mechanisms to enforce the agreed-upon rules, are still sticking points that stand in the way of a comprehensive agreement. The United States is reportedly also pressing Beijing to agree not to retaliate (likely including not filing cases in the WTO) if Washington decides to levy future tariffs on Chinese trade — a sensitive matter for Beijing, considering how such an agreement would limit its response.

Why It Matters

De-escalation of the trade battle, which has accelerated China's recent economic cooling, will undoubtedly be welcomed by countries and companies whose supply chains depend heavily on Chinese manufacturing. Significant details of the overall deal remain unsettled, however. And under any agreement that is signed, China will most likely meet the demands that Washington has outlined only partially. The concessions currently on the table focus primarily on China lowering its trade surplus with the United States and selectively easing market access restrictions and tariff barriers affecting certain industries, particularly those of most interest to Trump's Rust Belt and agricultural constituencies. It is thought that U.S.-Chinese negotiators have made agreements over currency issues and have tentatively settled on some trade enforcement mechanisms. But talks are continuing as they try to work out differences over structural economic issues.

Before China will agree to have Xi Jinping sit down with Donald Trump in a high-profile summit, it will want reassurances that the topics up for discussion will have been nailed down.

Before Beijing will agree to have Xi sit down with Trump in a high-profile summit, it will want reassurances that the topics up for discussion will have been nailed down, or at least addressed in advance. This includes the particulars of any structural economic issues that are currently being negotiated. The Chinese government, aware of the calls by Congress and some segments of the U.S. business community for Trump to extract tangible and verifiable concessions on structural reform from China beyond what have been offered, will want to ensure that the U.S. side will not raise unexpected issues once Xi joins the negotiation.

Background

For the past three months, high-level delegations from the United States and China have been trying to cut a deal that would allow their leaders to announce a cooling of their trade war, thus easing the concerns of international markets. Beyond China increasing its purchase of U.S. goods and easing market restrictions, lawmakers are reviewing changes to China's foreign investment laws that would prohibit forced tech transfers and allow foreign companies to compete with state and private domestic firms on more equal footing. But Beijing has shown little interest in bending to U.S. demands that it remove preferential treatment for domestic companies in strategic sectors and lessen its economy's dependence on state-owned enterprises — arguing that doing so would undercut China's right to choose its own path to development. 

Beijing has reacted to those concerns, however, by placing greater urgency on its plans to reform its state-owned enterprises and address intellectual property rights. But China will make only gradual progress on those issues, considering the domestic resistance to change, especially as economic stresses increase. This will leave at least some of the differences between the United States and China unresolved.

 

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