After weeks of escalating threats and tensions, China and the United States may be heading toward another truce in their trade war. But even if negotiations resume, the significant disagreements that remain between Beijing and Washington on trade issues, as well as more complicated national security issues, will make another uptick in hostility between the two great powers still possible.
A Respite From the Trade War?
Much to the relief of financial markets, the roller-coaster ride of the U.S.-China trade war has entered another period of calm amid signs the two sides may restart negotiations. On Sept. 11, U.S. President Donald Trump announced that Washington would delay the implementation of additional U.S. tariffs on Chinese goods from Oct. 1 to Oct. 15. In exchange, China has offered to buy a limited amount of U.S. agricultural goods with the expectation that the United States would eventually relax export controls on the Chinese tech giant Huawei.
Over the next two weeks, midlevel U.S. and Chinese officials are planning to discuss technical and procedural issues to lay the groundwork for a meeting early next month between lead U.S. trade negotiator Robert Lighthizer and his Chinese counterpart, Liu He. If the meetings go well and China makes enough promises, such as to purchase U.S. agricultural products such as soybeans and pork, the United States may be swayed to suspend tariffs for another period of time, or even indefinitely. After that, the two countries would be expected to continue negotiating a trade deal, which — in the most optimistic outcome — could be signed as early as November.
A Narrow Path to a Narrow Deal
Two weeks is certainly a shorter delay than China had hoped for. But it may be enough time for the two sides to at least explore getting talks back on track. But to reach a quick deal, the agreement would likely need to have a narrow focus and exclude some of the larger and more complicated national security-related issues that have continued to hamper progress. Such a "mini-deal" may focus only on trade issues or deficits, or it could even just formalize the specific thresholds of Chinese agricultural purchases the United States would demand before relaxing Huawei export controls. It is possible that a mini-deal could be broad enough to roll back some recent tariffs on Chinese shipments, such as those put into place earlier this month, should China expand some of its initial concessions.
Beijing is concerned that the larger security issues are impeding the chances of resolving at least some of the specific trade issues that could help defuse the threat of more U.S. tariffs. Thus, China has proposed splitting its dialogue with the United States into two tracks, with one focused on trade and other focused on broader national security and geopolitical issues — each of which would be handled by different negotiating teams.
The delayed U.S. tariffs could provide Beijing and Washington with enough time to restart trade negotiations.
But whether China's strategy for two-pronged talks will actually work will depend on two critical issues. The first will be agreeing on what issues fall into what track. Many U.S. political leaders (including those inside the Trump administration), for example, view relaxing Huawei restrictions as a national security issue and thus would place it into the broader track. But China views Huawei as more of a commercial issue and would argue that issues related to the tech company belong in the trade-focused track.
The second, and perhaps most significant issue, however, is whether the United States would even be open to allowing a formal split in talks. Washington will be reticent to rescind all of its tariffs on Chinese exports for fear of losing leverage in its broader national security talks with Beijing. With this in mind, the United States could push for a less comprehensive deal first that suspends further tariff threats and only partially reduces current tariffs (if at all). That said, there's a chance Trump could still want to present such a trade-specific deal with Beijing in November, which he can then frame as a win for both his trade policies and U.S. farmers ahead of the 2020 election.
Room for Escalation
Of course, any number of issues could cause another escalation between now and the end of the year. The United States will demand that China buy more U.S. agricultural goods as a precondition for continuing talks and, eventually, relaxing Huawei export controls. China, meanwhile, strongly insists that it'll only do so until after Washington relaxes those controls. The current temporary licenses that Washington has issued for some of Huawei's U.S. partners expires on Nov. 18. And while China wants that license extended and made permanent, it also wants the scope of U.S. export controls on Huawei to be narrowed. Moreover, China's position on key U.S. demands for structural changes related to China's industrial policy has continued to harden with little signs of easing.