The U.S. and China Reach a Trade War Truce

6 MINS READMay 22, 2018 | 16:05 GMT
U.S. Commerce Secretary Wilbur Ross delivers a speech in May 2018.

U.S. Commerce Secretary Wilbur Ross delivers a speech in May 2018. An agreement by China to increase imports of U.S. goods and services appears to have cooled off some of the heated trade rhetoric between the two countries. 

  • Despite its tentative trade truce with China, the United States will likely keep its tariff and non-tariffs options open.
  • De-escalation of the trade spats could mitigate some potential negative impacts on politically sensistive U.S. agriculture exports for the short term and increase the prospect of rising U.S. liquified natural gas exports.
  • Even if the two sides can reach a deal on issues such as boosting U.S. imports to China, the underlying competition between them will persist far beyond the current presidential administration in Washington.
The Big Picture

The United States and China have signaled a temporary pause in their escalatory trade tensions, but there are still few details about the deliverables. Washington will keep its options open for containing China's economic dominance and unfair trade practices through trade and investment restrictions. This means the disputes will endure and put the two on a long-term collision course.

An agreement by China to increase imports of U.S. goods and services appears to have cooled off some of the heated trade rhetoric that had been building between the countries over the past few months. But a statement issued May 19 after two days of talks in Washington between trade delegations that included Chinese Vice Premier Liu He and U.S. President Donald Trump left the details of those purchases vague. Although the immediate danger of a trade war between the United States and China appears to have eased, the longer-term competition between the world's largest economies will continue to put them at loggerheads.

U.S. Secretary of Commerce Wilbur Ross will reportedly travel to China next week to hammer out some of the details of the agreement that, if finalized, would reduce the trade imbalance between the countries. Shortly after the agreement, China announced plans to reduce import tariffs on selected automobiles from an average of 25 percent to 13.8 percent and those on auto parts to 6 percent. In response to China's moves, the United States, despite its internal divisions, has indicated it will ease its death penalty on China's telecom giant ZTE, which was banned from receiving core technology from American suppliers.

In the statement, China also promised to increase its purchases of U.S. agricultural and energy products, and to push forward reforms of its intellectual property laws. But no specifics over volume of trade or the time frame for the reforms were detailed in the agreement. Although U.S. Secretary of the Treasury Steven Mnuchin said that Chinese agricultural purchases could rise by as much as 40 percent this year and that U.S. energy sales to China were expected to double in three to five years, details have yet to be worked out. If the United States does not like what it hears from Chinese negotiators during those talks, it could still slap tariffs on Chinese goods and exercise other aggressive non-tariff options.

Here's what is known about the situation based on the joint U.S.-Chinese statement and what to watch for as more detailed negotiations between the two sides get underway.

What the Joint Statement Detailed

It is unknown at this point what agricultural and energy products are involved. But during the so-called "100-day plan" signed in 2017, China pledged to ramp up its purchases of liquified natural gas (LNG), beef and chicken from the United States. Some progress has been made. For instance, China has signed its first long-term LNG contract with U.S. firms. But the escalatory trade spats also compelled Beijing to hit key U.S. agricultural products such as apple, sorghum and potentially soybeans and pork in a bid to impose political costs on the Trump administration.

Deescalating trade spats could, at a minimum, avoid negatively impacting some of the more sensitive U.S. agricultural exports, such as soybeans and sorghum, for the short term. It also raises the prospect of increased Chinese imports of U.S. natural gas, particularly as the country pushes to upgrade its industrial sector and contain pollution. Demand for U.S. LNG has already been rising in China, which has set a goal of doubling natural gas consumption by 2020 from 2015 levels. It imported six times more LNG from the United States in 2017 than the previous year. And with four more U.S. LNG export terminals coming online over the next two years, increasing Chinese imports are a benefit for both sides. But U.S. LNG exports are also in demand in other countries that have been the subject of trade rancor from the White House, including Japan and South Korea. And even with its annual imports of U.S. agricultural products totaling about $20 billion and its oil and gas purchases coming to around $7 billion, doubling or tripling the purchases wouldn't make up for a substantial reduction in trade surplus, let alone the 200-billion-dollar reduction that the United States has demanded.

What the Joint Statement Omitted

There were no indications of how quickly China would move toward increasing intellectual property protections or how broadly those changes would be instituted. Foreign competitors have long complained that lax intellectual protections and forced technological transfers have given China's industries an unfair competitive advantage, and it has been a core component to U.S. demands that China work to reshape these practices.

Other points of contention left unaddressed include how Beijing would approach reducing restrictions on foreign investment in China and when or whether it would open economic sectors that are now closed to such investment. The U.S. Treasury Department, meanwhile, was expected to propose its own revised rules on Chinese investment into the United States.

The Lasting Competition Between the U.S. and China

Even if the two sides sign off on the details that fill in the broad outlines of their trade agreement, the fundamental differences between China and the United States over trade and economic practices will remain. China's companies and markets are better able to weather foreign competition, and as it cultivates an environment to enhance innovation and develop its tech sectors, it acknowledges the needs for IP protection. Thus, the agreements to shrink China's U.S. trade surplus were relatively easy to reach, along with China's pledge to open its markets and enhance intellectual property protections at its own pace, compared with other issues brewing between the countries.

Some of those stickier issues were not addressed in the joint statement. For instance, China will not give up its state-funded"Made in China 2025" initiative, the strategy to support its maturing domestic technology sector, even if it risks sparking a trade war with the United States. Although Beijing is reportedly considering inviting foreign companies to take part in the program, in part to defuse trade tensions with the United States, the U.S. sanctions targeting Chinese telecommunications equipment maker ZTE only strengthened Beijing's resolve to achieve state-led tech independence.

Another point of contention was the U.S. restrictions on high-tech exports to China. Beijing has long argued that relaxing U.S. export rules on technology would help reduce the trade imbalance between the countries. The New York Times reported that such discussions had been included in the Washington talks, with Mnuchin reportedly pushing to relax the rules, but that idea faced pushback from the U.S. Department of Defense.

However this round of trade competition between the United States and China plays out, the underlying economic and strategic differences between the two global heavyweights are not easily resolved. And even if this pause in the trade skirmishes between the countries holds, and a full-blown trade war can be averted, those fundamental differences will continue to manifest themselves in the economic arena.

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