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Timely Truce

The world has breathed a sigh of relief as China and the US reached agreement on reducing the US trade deficit, but tensions over trade and investment relations may persist in the long term

By NewsChina Updated Jun.5

After months of threats and counter-threats to raise tariffs on each other, the US and China, the world’s two largest economies, appear to have averted an all-out trade war after the second round of high-level talks on the issue held May 17-18 in Washington between a Chinese delegation led by Liu He, vice-premier and special envoy of Chinese President Xi Jinping, and US officials, including Treasury Secretary Steven Mnuchin, Secretary of Commerce Wilbur Ross and US Trade Representative Robert Lighthizer. 

Armistice

Following the talks, the nations released a joint statement pledging to “substantially” reduce the US trade deficit in goods with China. To achieve that, there will be “meaningful increases” in US agriculture and energy exports to China in the future.

Mnuchin told reporters he expected American agricultural exports to China to rise by between 35 and 40 percent this year and energy purchases to double over the next three to five years. 

On the issue of intellectual property protection, China pledged to “advance relevant amendments to its laws and regulations in this area, including the Patent Law.” On the issue of investment, “both sides agreed to encourage two-way investment and to strive to create a fair, level playing field for competition,” according to the statement.

Liu told China’s State-run Xinhua News Agency that the two sides had “pledged not to engage in a trade war.” China’s Ministry of Commerce (MOFCOM) announced on May 18 that it was halting its anti-dumping investigation into imports of sorghum from the US. 
 
Mnuchin told the media the two sides had made “meaningful progress” on the trade issue, and the US government would halt proposed tariffs on up to US$150 billion in Chinese products.  

In the investment field, Trump earlier hinted he would relax US sanctions on Chinese smartphone-maker ZTE, which had been subject to a seven-year ban on transactions with US companies. It was forced to suspend its business operations in the US after violating a settlement with the US government last year over its secret exports of technology to Iran. For their part, China’s regulatory authorities approved the US$18 billion sale of Toshiba Corp’s chip unit to a consortium led by US private equity firm Bain Capital. These issues, while not directly related to the trade spats, have been seen as bargaining chips.  

Lines in the Sand 

While the ceasefire has eased anxiety in the financial markets and sparked a jump in the Asian and US stock markets, it has been criticized by trade hawks on both sides. 
 
In the US, many argued that the failure to press China to agree to a quantitative target on cutting the trade gap and specific measures on intellectual property protection and investment mean a total victory for China. Back in China, many consider Beijing’s agreement to reduce its trade surplus with the US a major concession that betrays earlier rhetoric that it was not afraid of a trade war and would “fight to the end.”
  
Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation at MOFCOM, argued in a widely shared commentary that China has managed to maintain what he said were three “bottom lines” considered non-negotiable by the leadership.  

First, the two countries agreed to increase US exports to China, a “proactive” approach in addressing the trade imbalance which contrasts with the “passive” approach of reducing Chinese exports, as the Trump administration had threatened to do. Mei said that the proactive solution adopted in the joint statement was in both countries’ interests.  

“By adopting a proactive approach, China can maintain its purchasing power, which will provide more market and employment opportunities to American business and workers,” Mei said. China has long argued for a win-win solution to address its trade disputes, rhetoric also adopted by the joint statement, which held that China would significantly increase its purchase of US goods and services ���to meet the consumption needs of the Chinese people and the need for high-quality economic development,” which “will help support growth and employment in the US.” 

Second, China successfully avoided setting a specific target, such as the US$200 billion figure flagged by US officials ahead of the talks. According to data released by the US, its trade deficit with China reached a record US$376 billion in 2017. On Chinese data, which uses different calculations which do not include the value of parts of products made outside China, the figure is a much smaller US$276 billion. China has long argued that the US figure, which does not include the trade surplus of US$54.1 billion enjoyed by the US in the services sector, represents a distorted picture of bilateral trade. The Trump administration’s quest for China to accept a US$200 billion reduction was seen by many in China as unrealistic and humiliating. 
 
Third, Mei said China had safeguarded its right to “[upgrade] its industries” and to “self-development,” referring to the Made in China 2025 initiative. When the Trump administration released its list of Chinese products subject to tariff increases, it was widely considered to be aimed at Made in China 2025, an initiative to upgrade China’s industry and boost China’s high-tech sectors. As the US halted the proposed tariffs, China’s growing high-tech sector can feel a sense of relief, at least in the short term. 


 Lasting Peace? 

But while trade tension may have eased, few experts believe the joint statement means a future trade war has been averted.  

According to Zhang Yuhuan, a researcher at the China Institute of International Studies, the Trump administration has agreed to a ceasefire on the trade war because of infighting within the administration.  

There is a well-known rift between trade hawks like US Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro, who have demanded that China fundamentally change its industrial policy, and moderates like Mnuchin and National Economic Council Director Larry Kudlow, who pushed for an agreement with China to ease the market’s concerns. If there is a change in the dynamics of the infighting within the White House, the trade war could be rekindled.  

Zhang said given the vagueness of the joint statement, the real key to a lasting consensus may lie in the future trade consultations and negotiations outlined in the joint statement. 
 
The North Korea nuclear issue may also have played a role in the de-escalation of trade tensions, as Trump ponders whether and when he should meet with North Korean leader Kim Jong-un. In a tweet posted a couple of days after the talks, Trump warned that, “China must continue to be strong & tight on the Border [sic] of North Korea until a deal is made,” claiming that it had become “much more porous and more has been filtering in.” 
  
Nevertheless, trade disputes may pose a long-term threat to the US-China relationship. Zhang said the US-China trade imbalance is down to their different position in the global division of labor, in which China has advantages in the labor-intensive and resource-intensive sectors, while the US has advantages in the financial and high-tech industries. As China develops its high-tech sectors, trade relations between the two countries will only become more competitive in the long run. 
 
To Zhang and Mei, facing this new normal in the US-China trade relationship, China should maintain “strategic patience,” promoting arrangements that maximize cooperation and bring mutual benefit to both countries. Many analysts believe that despite possible recurring trade friction, the two countries can work to accommodate both sides’ interests and keep the world economy on the right track.
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