snapshots

U.S., China: Trump and Xi Agree to Pick Up Where Stalled Trade Talks Left Off

5 MINS READJun 29, 2019 | 15:15 GMT
The Big Picture

The U.S.-China trade war has been going on for 16 months and the two sides have put tariffs on nearly $400 billion worth of goods between them. Talks broke down in May but are now in the process of restarting. If past negotiations between China and the United States are any indication, the new talks won't be easy.

What Happened

It feels like deja vu all over again as the 2019 G-20 summit ends the same way as the 2018 G-20 summit: With China and the United States agreeing to a truce in their trade war and vowing to restart trade negotiations. As a part of Washington and Beijing's truce, the United States has agreed to indefinitely delay placing more tariffs on Chinese imports — including the current threat to put tariffs on about $300 billion worth of goods — as long as the trade negotiations make progress.

In addition to the tariff cease-fire, the United States has reportedly agreed to lift some of its export controls on Chinese technology giant Huawei Technologies. In exchange, China has promised to buy more American agricultural products. What's not clear is when such activity will take effect. During his news conference wrapping up the G-20, U.S. President Donald Trump said the United States would save the Huawei issue until "the end," implying that removal of export controls may not occur until China and the United States seal their elusive trade deal. But Trump noted that the U.S. Commerce Department would begin holding meetings on July 2 to discuss what kinds of American exports to Huawei the United States could allow.

A Long Road Awaits

Despite China and the United States agreeing to another pause in their trade hostilities, the negotiations that lie ahead are fraught with possible sticking points and will be anything but smooth. After all, Washington and Beijing have agreed to two such temporary agreements before, and both eventually broke down. Even though the United States has claimed that 90 percent of the trade deal has been written, many of each side's key demands and red lines remain unresolved.

China has three core demands. First, it must find any U.S. requirement regarding its purchase of American products reasonable. For China, conceding on this issue is easy as long as the demands can be met. Second, the final trade deal must be a balanced agreement. China views itself as the United States' peer and won't capitulate to demands that compromise its sovereignty. Finally, any deal must remove all tariffs that the United States has placed on Chinese goods in 2018 and 2019. This is a tricky condition since the United States has pushed for removing tariffs as China implements the deal, not before. To reach a final trade deal, it is likely that Beijing and Washington will both have to compromise on tariffs, with some being removed quickly and others removed over time.

It's clear from this latest cease-fire that President Trump wants a deal with China and may be willing in the end to weaken some U.S. demands to get one.

The United States also hasn't reduced many of its demands at this point, but what is clear from this latest cease-fire — and from the fact that, unlike the previous trade truce, there is no deadline attached to this one — is that Trump wants a deal with China and may be willing in the end to weaken some U.S. demands to get one. Nevertheless, as trade talks restart it will be crucial to see whether the United States modifies any of its demands, particularly over the tariff removal process and the manner in which China implements the deal at home. Washington's insistence on China changing its domestic laws instead of using administrative action to implement key aspects of the deal was the main reason talks broke down in May.

The Huawei issue is a key demand for China as well. Huawei is dependent on accessing U.S. technology and about one-third of its key suppliers are American companies. Even though the United States and China may eventually reach a trade agreement, their broader geopolitical and tech competition will continue to expand. Therefore, we should expect the United States to continue looking for ways to limit China's technological ascent — meaning the United States is unlikely to completely remove export controls on Huawei. The U.S. National Security Council is reportedly looking at a plan that would narrow the focus of the export controls to "chokepoints" in wireless networks that Huawei could control (such as 5G core networks).

Nevertheless, for the time being, the U.S.-China trade war will enter a period of negotiation and renewed hope for a deal. Challenges undoubtedly await, but the global economy can let out a sigh of relief as Trump declined to follow through on two major trade threats in June: against Mexico and now China.

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