Trade War: Washington and Beijing Called a Truce

03/12/2018

China and US agreed to suspend new trade tariffs for 90 days. Donald Trump understood that his stance on trade could cause serious damage to the global economy, as warned by International organizations and US media

 

Donald Trump and Xi Jinping, the leaders of the world’s two largest economies, finally met face-to-face Saturday in Argentina for a highly anticipated dinner that many hope will halt, at least temporarily, an escalating tit-for-tat trade war.

It was the first meeting between the two leaders since a trade war erupted earlier this year. Larry Kudlow, the US president’s top economic adviser, told reporters that Trump and Xi’s meeting went “very well.”

According to Chinese and American media, the meeting “was a success” and both sides have agreed to halt new trade tariffs for 90 days to allow for talks, the US says. At a post-G20 summit meeting in Buenos Aires, Mr Trump agreed not to boost tariffs on $200bn (£157bn) of Chinese goods from 10% to 25% on 1 January. China will buy a “very substantial” amount of agricultural, industrial and energy products, the US says.

 

©123rf. Shanghai port. Washington and Beijing agreed to suspend new trade tariffs for 90 days, but is not the end of US-PRC trade-war.

 

Is trade-war end? Not yet. As the White House says in a statement. “the US tariffs on Chinese goods will remain unchanged for 90 days”, it but warns “if at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25%.”

The US says China agreed to “purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between our two countries”.

Chinese Foreign Minister Wang Yi also told reporters after the talks that “the principal agreement has effectively prevented further expansion of economic friction between the two countries”. He hailed “new space for win-win cooperation”, while Chinese state TV said negotiations would continue.

 

©123rf. US public opinion and media called for a better dialogue between US administration and China.

 

“Where we are right now is in a place of considerable uncertainty,” said to CNN Craig Allen, president of the US-China Business Council. “Clearly, there’s a lot of jockeying going on within the administration with pretty sharp contrasts between the positions that people are taking. That’s what makes this so unpredictable. We don’t know where it will end up.”

But critics concerning Washington approach to China, reveals deep divisions in Trump’s own West Wing between free traders – including those with Wall Street backgrounds like Mnuchin and Kudlow – and trade hawks like Lighthizer and Navarro. Public opinion is divided too where economists and media such as Financial Times or NYC asking for mild approach.

 

Why Trump’s ‘get tough on China’ policy is counterproductive? Economists remind White House that China is not Mexico or Canada. The naive and protectionist american administration is wrong on different counts.

 

In March President Trump tweeted: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” This declaration set out the aims and means of Washington’s trade policy. The apparent victory over Canada and Mexico and the signing of a new bilateral trade deal will convince US administration is right.

But experts reminded to Mr. Trump how China is not Mexico and would insist that seeking a surplus with every trading partner is not “winning”. It is absurd. This is not even mercantilism, which would focus on the overall balance. As Martin Wolf stated on FT “it is incredible that such primitive ideas rule the most sophisticated country on earth”.

 

©123rf. Wall Street. American experts, finance in primis, are worried about US-China trade war escalation will affect US economy too.

 

What Washington don’t understand is that PRC is not directly dependent by US market. China exports to the US are a substantially larger share of its GDP than vice versa, at 4.1 %, against 0.7 per cent, in 2017. PRC’s bilateral surplus was about 3.1% of its GDP, which is far down from the 10.2 % in 2006.

In the worst of hypothesis, imagine that Washington imposed prohibitive tariffs on all Chinese exports. One might think the effect would be to lower China’s GDP by almost 4%. One would be wrong. US exports to China would also fall, as Chinese retaliation bites. Furthermore, Chinese exporters could also sell their goods elsewhere, as recent data had shown.

 

©123rf. China will not abandon hopes of technological upgrading. Following “Made in China 2025” program, today PRC is leader in robotics and atomization.

 

In the end, the fall in China’s GDP in such a trade war would be less than 2 per cent, other things equal. This is about four month’s growth. Moreover, it would not be hard for China to offset such a loss of demand. Meanwhile, the overall US trade balance would probably not change a wit, since that is determined by domestic supply and demand.

But Trump’s administration has made other mistakes. First, the White House has over-reached. Chinese leadership cannot deliver bilaterally balanced trade because it is unable to force Chinese people to buy goods they do not want.

 

Plus, the point about US trade with China is not that its imports are so high. The difference is the low level of US exports. That shows lack of competitiveness of US factories. Finally, China will not abandon hopes of technological upgrading.

 

Second, Mr. Trump has exaggerated United States power and appeal. If order to achieve outcomes, Washington needs allies, especially the EU and Japan. But from Bruxelles to Tokyo, everyone has shown reticency about US trade policy. For example Germany, was one of the first EU country to deny US policy.

But suppose the conflict escalates instead, ending up with high bilateral tariffs. Who wins? The broad answer is nobody: trade is disrupted, the rules-governed trading system is devastated, relations between the US and China are damaged and the world becomes more perilous.

 

©123rf. Trade war had “boomerang effect” on US enterprises too. Tariffs inflict pain on firms located in the US that use Chinese imports as inputs in their production process to make finalized products for sale.

 

Third, and should be the most obvious, is how White House is underestimating Chinese traditional determination and temperament.  As Harry G. Broadman said, “ the Chinese are nothing if they are not a patient bunch”.

Looking back to Chinese history, they have been methodically designed a the long-term programs,  and this is different from many other parts of the world, where “short-termism and instant gratification are a way of life”. And finally, it’s well known that tariffs hurt US consumers.

From East coast to West coast, consumers and producers associations asked for a better dialogue between US administration and China. This, already mined Trump consensus. At the same time, tariffs inflict pain on firms located in the US that use Chinese imports as inputs in their production process to make finalized products for sale.

 

From “Made in china” to “Made with China”. The idea that US is winning against China, is a dangerous myth. PRC’s economy is still roaring and China is becoming a high-tech giant.

 

We know for ages China was considered as a “me too” kind of technology society. But in the last 10 years, we see China innovative in more and more areas. As Chen Liming, CEO di IBM China, stated in Tianjin at Davos summer summit “actually, today many multinational companies  are transforming tour roles, entering the so-called ‘Made with China’ stage, which means innovating together with their Chinese counterparts.

“Of course, during this process, Chinese enterprises are making rapid progress as well. There arise a number of Chinese companies with absolute advantage in the international market”, said Mr. Chen.

 

©123rf. Akihabara, Tokyo. If order to achieve outcomes, Washington needs allies, such as Japan. But Tokyo already shown reticency about US trade policy.

 

Chinese export machine is moving up the value chain. Why America is still trying to contain it? Looking for a better dialogue between counterpart would be a win-win collaboration, but, instead of Chinese government, US administration’s stance on trade is not changing.

The spectacular rise of China over the past two decades and the relative decline of the US mean that sparks are bound to fly. PRC is in the way of surpassing the US economically. By one measure, 35% of world growth from 2017 to 2019 will come from China, 18% from the US, 9% from India, and 8% from Europe. By 2050, the top five largest global economies are most likely to be China, India, the US, Brazil and Indonesia. Is the west even remotely prepared for this kind of world?

 

Is the Is the global order changing? Public opinion in Western countries thinks that Beijing, nevertheless its internal political contradictions, is a more conscious alley instead of Washington.

 

China is not only the second economy in the world. Actually, the Middle Country is the second-largest spender on research and development (R&D) after the US, accounting for 21% of the world’s total of nearly $2 trillion in 2015.  But China’s investments on R&D grew by an average of 18%, more than four times faster than US spending.

The old global liberal order was purposefully designed by the US and its western allies. Washington helped to compose United Nations, the International Monetary Fund and World Bank, the World Trade Organization, the North Atlantic Treaty Organization.

 

©123rf. The new speaks Chinese. Today Beijing is the champion of globalization, of that global purposefully designed and created by US.

 

But the same country that built up the world as we know, is now moving back. The new is speaking Chinese. By the way, if the leaders of major countries and international organizations cannot see eye to eye, we are in for a very rough ride.

We are living in abnormal times, where international system itself is exposed to profound instability. But if some countries are asking a better dialogue to create a real international win-win collaboration, others are deaf and bling, moving forward instead hearing critics.  Populism and the rise of parochial economic nationalism are the gravest threats to future stability. Has Mr. Trump changed his idea about China? Difficult to say, but this truce is a first step.

 

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