Economic pressures forcing Trump and Xi to play ball

There is a deeper reality behind the temporary trade truce between China and the U.S. announced after the dinner shared by President Trump and Chinese President Xi Jinping at the Group of 20 (G20) summit in Argentina.

President Trump agreed not to impose stiffer tariffs against Chinese goods on Jan. 1 in return for unspecified increased purchases of U.S. products by China and an agreement to negotiate reductions in China’s deep structural barriers to U.S. trade and investment:

• forced technology transfer and joint venture requirements,
• intellectual property theft and
• substantial government subsidies to Chinese companies.

{mosads}President Trump set a 90-day deadline (Saturday to March 1) for negotiation of structural issues, making clear that if agreement is not reached, higher tariffs will be coming.  

The reality is that President Trump and President Xi each appear to have recognized that they do not hold all the cards in this trade battle and that an all-out trade war between the world’s two largest economies would slow growth in both of them. The politics of that are not good for either of them.

President Trump has said that he believes it will be an “incredible deal … if it happens.” Treasury Secretary Steve Mnuchin indicated that China made $1.2 trillion in new commitments and that the two sides want to make this a “real” trade agreement.  

This may sound familiar, but the circumstances are different. The two leaders agreed to something similar on May 20: China said that it would substantially increase purchases of U.S. goods, reduce tariffs and take concrete steps on “structural issues.”

Then as now, financial markets heaved a sigh of relief, celebrating the trade war being “on hold.” But that deal went up in smoke when it became clear that China was not yet prepared to undertake a serious negotiation, nor meaningful structural changes to policies central to its plans to dominate leading-edge technologies.

That set off rounds of tit-for-tat tariff escalations and harsh complaints about China’s unfair practices by the president and his team.        

The Trump-Xi G20 agreement emerged in a different environment. Pressure has grown since last May in both nations to end the trade war.

In both markets, consumer and producer prices went up, stock markets wobbled and growth slowed while domestic frustration with the impacts of rising tariffs, investment barriers and business uncertainty increased.

U.S. companies and lawmakers on both sides of the aisle clearly want the pain of tariffs to end and for China to make real concessions.

This week in the United States, Sen. Chuck Grassley (R-Iowa), representing a state hard-hit by tariffs, said he might support legislation to limit the president’s ability to impose new tariffs on national security grounds, which President Trump used to justify steel and aluminum tariffs.

China’s companies are also under substantial pressure. Other suppliers, including Vietnam, Indonesia and the Philippines, are stepping in to meet the needs of U.S. producers, and U.S. companies are finding new customers and partners outside of China.  

U.S. and Chinese tariffs on over $350 billion of each other’s products have roiled global supply chains and markets and hit consumers’ pocketbooks in the U.S., China and beyond. China’s retaliatory tariffs on U.S. farm exports also hit a key political base for President Trump.

China’s markets had fallen by over 30 percent in 2018 but bounced up over 2.5 percent the day after the Trump-Xi deal was announced.

The specifics of this new U.S.-China agreement remain unclear. The White House version differs from China’s version of events, and the president has added his own spin.

The White House statement sets a 90-day time frame for negotiations on structural changes. After that, if there is no agreement, the U.S. will increase tariffs.

The U.S. version references China’s commitment to buy “very substantial” amounts of farm, energy and industrial products, including more U.S. agricultural products immediately.

China’s statement does not include time frames, asserts that there will be no new tariffs and merely offers to buy “more U.S. goods.”  

The U.S. stresses that immediate negotiations will occur on forced technology transfer, intellectual property protection, non-tariff barriers and cyber theft. China merely references efforts to reach consensus on trade issues.  

On the other hand, China cites agreement to bilateral visits by heads of state, by each side to provide more market access, on U.S. support for the One-China policy and for Chinese students studying in the U.S.

U.S. statements reflect none of this. President Trump tweeted that China would reduce the 40-percent retaliatory tariff on U.S. autos it imposed in July, but China has not confirmed this. Still, both sides acknowledge China’s commitment to more tightly regulate sales of fentanyl, a synthetic opioid that adds to the U.S. crisis. 

The G20 discussions themselves were also revealing as to the administration’s thinking. The U.S. again refused a near-cliché G20 declaration reference to combatting protectionism. Trump’s team remains divided about the use of tariffs to get results from China.

The doves may have “won” at the G20, but President Trump’s desire to keep a tight grip on the upcoming negotiations and the designation of Trade Representative Robert Lighthizer to lead the U.S. team mean that it will not be easy sledding for China.

President Trump could still end up imposing new tariffs on China after March 1 if he deems China’s offers insufficient. Given incentives for both sides to make real progress, however, even if not all of the U.S. demands are met in the first round, success is more likely than in May.  

With an eye on 2020, President Trump will not want an economic downturn at election time. This is one reason his team is also prepared to negotiate a trade agreement with Japan and is holding off on stiff auto tariffs on European cars.

{mossecondads}At the G20, the president committed the U.S. to “work together to improve a rules-based international order,” including financial flows, a “modern international tax system” and reforms of the World Trade Organization (despite past threats to withdraw).

While reiterating opposition to the Paris Agreement, the U.S. agreed to “encourage energy transitions that combine growth with decreasing greenhouse gas emissions.”  

President Trump appears to be signaling a pivot from trade wars, unilateralism and threats to concrete deals, greater policy certainty and support for international economic rules and institutions.

He has good reason to do so given that domestic politics and economic imperatives so clearly overlap; the same could be said of President Xi. Time will tell whether they heed international and domestic pressures for an agreement by March 1.  

Stuart Eizenstat is the former U.S. ambassador to the European Union, undersecretary of commerce and international trade, undersecretary of state for economic, business and agricultural affairs and deputy secretary of Treasury in the Clinton administration (1993-2001). He was also the chief White House domestic policy adviser to former President Jimmy Carter (1977-81). 

Anne Pence is a former international policy adviser to the State Department (1992-2005).