US-China Temporary Trade Truce


US President Donald Trump and Chinese leader Xi Jinping have agreed to halt new trade tariffs for 90 days to allow for continued talks over recent trade disputes. The breakthrough came after a post-G20 summit meeting. Trump has agreed not to boost tariffs on $200bn of Chinese goods from 10% to 25% on January 1st , 2019. Whilst Jinping has agreed that Beijing will buy an unspecified, but ‘very substantial’ amount of agricultural, energy, and industrial products from the US market, to reduce the trade imbalance between the two nations. Jinping has also pledged to immediately begin negotiations on structural changes with respect to forced technology transfer and intellectual property protection.

 

Chinese Foreign Minister Wang Yi has said that “the principal agreement has effectively prevented further expansion of economic friction between the two countries.” Trump showcased his satisfaction with the agreement in various ways, notably underlining how this deal will have an ‘incredibly positive impact on farming’. Einar Tangen, a political analyst and investment banker based in Beijing says that the truce was “an excellent outcome,” given the threats of escalation in months preceding the meeting.

 

The steps agreed so far seem to be leading trade agreements down the right path. Beijing has also agreed to designate Fentanyl as a controlled substance, which is great news it is reportedly causing an epidemic of opioid-related deaths in the US. However, the losers of the 10% trade tariff imposed on Chinese goods are  American farmers who have been hurt by reduced Chinese imports of soybeans and other products. Furthermore, Chinese companies will feel the impact of the tariff as a 25% increase would have dramatic impacts on Chinese firms. Therefore, President Xi has been under pressure to come home with a deal that won’t damage Chinese manufacturers. The same goes for Trump who is under pressure from US lobby groups, who have pointed out that higher tariffs would mean higher costs for American manufacturers, leading to higher prices for US consumers. This suggests that both countries have a lot to lose if the trade deal isn’t finalised within the newly set 90-day time limit.

 

This face-to-face meeting has been the first between the two leaders since the trade war erupted earlier this year after Trump complained that China wasn’t doing anything to cut its large surplus. Due to America’s concerns about Chinese unfair trading practices regarding their transfer of American technology and intellectual property to Chinese companies the trade war quickly escalated. It has involved both countries imposing tariffs on billions of dollars’ worth of goods, with the US hitting Chinese goods with $250bn of tariffs since July, and China retaliating by imposing $110bn worth of duties on US products. China also blocked a tie-up between two major semiconductor manufacturers, Qualcomm and NXP, as a response to American trade tariffs.

 

The key part of this newly arranged agreement for the US is the reduction in forced technology transfers to China, and China’s willingness to give US firms more access to their market without restrictions such as 50-50 joint venture arrangements with Chinese firms and heavy subsidies. Despite the positive talks so far, these policies will likely cause the most issues nearing the 90-day deadline. This is because of Xi Jinping’s industrial policy, ‘Made in China 2025’, an aim to make China a world leader in technologies of the future. Will President Xi be willing to encourage US technology firms to set up and access similar benefits to Chinese firms, which could possibly threaten the 2025 vision? We can’t yet determine whether both parties will be able to reach an economic trade deal within the 90-day period, as its unclear how much China is willing to sacrifice towards this deal. These agreements aren’t representing the end of the trade war, merely a temporary trade truce. How willing will China be to allow international access to its huge market, and how threatened do their home companies feel by American trade tariffs? With the White House warning that following the 90 days, with no agreements, the tariffs would rise to 25%, these two questions could possibly play the largest role in China’s decisions.