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Averting a global calamity? Trump and Xi at the G20

The outlines of a trade deal between the United States and China are there. But without a return to the negotiating table, the dispute could rapidly escalate, magnifying the damage to world growth.

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Key Findings
  • With the Osaka G20 meeting looming, Chinese analysts and policymakers visited in Beijing are pessimistic about the prospects for a trade deal with the United States.
  • If they are right, global financial markets are in for a much wilder shock than anything yet seen in this quarrel.
  • Yet much of a deal has already been agreed, while the consequences of not reaching a deal have become increasingly dire.

Executive Summary

With the Osaka G20 Summit looming, some Chinese analysts and policymakers in Beijing are pessimistic about the prospects for a trade deal with the United States. If they are right, global financial markets are in for a much wilder shock than anything yet seen in this economic quarrel between the United States and China. Yet a deal is possible — and much of it is already agreed. At the same time the consequences of not reaching a deal have become increasingly dire.

China opinion pessimistic about a deal

Chinese views on the likelihood of a trade deal with the United States were once optimistic but have turned gloomy. “A couple of months ago I thought the chance of agreement was 80 per cent,” one analyst told me in Beijing recently. “Now I think it is 50 per cent.” Others rate the chances much smaller. “I now doubt there can be agreement at all,” says one well-informed foreign observer. Some analysts worry the United States is intent on blocking China’s technological progress, making agreement impossible. “I got it wrong,” said one former optimist. “The United States does not want agreement; it wants to block China.”[1]

In a week of meetings with government officials, analysts and foreign observers, most thought the US–China trade dispute was widening rather than narrowing, with the issues becoming more intractable rather than less, and the outcome more uncertain.

If the pessimists are right, the global economy is in for a much wilder shock than anything the US–China trade dispute has yet produced. Absent an agreement, US President Donald Trump will decide in July whether to extend the 25 per cent tariff to the $300 billion in Chinese imports to the United States not already covered by penalty tariffs. That would more than double the value of Chinese imports subject to the penalty tariff. China has already declared it will respond with further tariffs, likely extending to the total of goods imports from the United States. It is possible that within a couple of months the entirety of goods trade between the United States and China will be impeded by high tariffs.

At around the same time, the United States would implement restrictions on sales of US products to Huawei, including Google’s Android operating system and American-made computer chips. Designated US transactions with Huawei would be subject to a ‘presumption of denial’ by the US Department of Commerce’s Bureau of Industry and Security.[2] Announced in mid-May but with implementation then postponed until 19 August, the restrictions on Huawei and perhaps on half a dozen other Chinese technology businesses would mark an entirely new stage in the economic quarrel between China and the United States.

Seeking negotiating leverage, China might respond by imposing constraints against US businesses operating in China, limiting their access to what is now the world’s second biggest and fastest-growing market. Quantitative restrictions could also be part of that response. China supplies 80 per cent of US imports of rare earths, a product necessary for many high-technology products.

With penalty tariffs there are, at least, reasonably clear numbers and more-or-less predictable effects. The International Monetary Fund, for example, calculates that penalty tariffs on bilateral goods trade between the United States and China would cost the global economy 0.3  per cent growth in 2020 after a 0.2 per cent loss in 2019.[3] The US Chamber of Commerce now calculates that the imposition of higher tariffs on all Chinese products could alone cost the US economy $1 trillion over ten years.[4]

With tit-for-tat attacks on major business firms, there is no obvious way to limit the duration or the extent of the damage, or even to calculate its cost. The full cost of wider and more extended assaults by the United States and China on each other’s business corporations will be discovered only by experience, and time. The Chinese affiliates of US corporations sell products worth more than $600 billion a year, mainly in China — three times the value of direct US exports to China.[5] In a wider economic conflict, those sales are at risk.

Following the Huawei precedent, the United States may deny further advanced technologies to Chinese businesses. Huawei puts its revenue cost due to US impediments at $30 billion over the next two years.[6] Yet China is itself a formidable competitor in advanced technologies, complicating a US offensive. It is now the largest user of industrial robots. It buys a third of the robots produced worldwide, and produces an equivalent share.[7] Chinese businesses now control one-third of patents applications sought for 5G technologies, more than double the US share. Huawei alone controls more 5G patents than the total held by US corporations.[8] US companies account for half of all artificial intelligence businesses, and China one-third.[9] Taiwanese technology company Foxconn now plans a $9 billion chip-making project in China, strengthening the domestic supply of semiconductors.[10] Even so, analysts in Beijing were not confident China could readily replace advanced technology products the United States may deny Chinese businesses.

It would take some time for interruptions to supply chains to become apparent, more time still for the consequences of technology denial to show up in changed products and new technologies. Through the financial markets channel, however, some of the costs might be quickly apparent.

For example, after a steep sell-off in May, largely in response to the collapse of China–US talks at the end of April, the US S&P 500 index has since rallied. It is now above the record high reached before the May downturn. Much of that rally builds on hopes for a US Federal Reserve rate cut later this year. The expected cut is now priced in. A sharp deterioration in the economic relations between the world’s two largest economies is not.

Whether there will be a new round of punitive measures and countermeasures and how severely they may hurt the global economy may be apparent after President Trump and Chinese leader Xi Jinping meet at the G20 in Osaka, Japan, on 28 and 29 June.

A trade deal is still quite possible

Despite the pessimism among some analysts in Beijing, a deal between the United States and China is still more probable than not — although the outlook may get very much worse before it gets better.

While hard-line decouplers in the White House and in the US national security apparatus may not want a deal, US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and President Donald Trump behave as if they do. Tariff penalties were imposed on China a year ago to bring about a deal on US terms. The Trump administration has engaged in 11 rounds of negotiations involving hundreds of officials across major departments in Washington. It has at various times postponed application of further tariff penalties so that negotiations could continue.

For its part China also wants a deal. It did not initiate the trade quarrel. Since mid-2018 it has taken steps to further open its economy and placate the Americans. It has announced plans for tariff cuts, and more liberal rules permitting wholly owned foreign businesses in auto production and parts of finance. It replaced case-by-case decisions with a list of which foreign investment is not permitted. At the March National People’s Congress it issued draft laws giving foreign affiliates the same access to subsidies as domestically owned businesses, extending intellectual property protections and banning forced transfers of intellectual property. It agreed a year ago to import more from the United States, an understanding ratified when Donald Trump and Xi Jinping met at the end of the G20 in Argentina in December 2018.

Until recently, China has avoided a sustained public propaganda campaign against the United States. It has for the most part tried to stop the trade dispute bleeding into security disputes, as has the United States. Without announcement, China appears to have complied with unilaterally imposed American sanctions on buying oil from Iran. Faced with protests, China either supported or more likely initiated the suspension of proposed extradition legislation in Hong Kong in June 2019. That same month, Xi Jinping visited North Korea to help restart its negotiations with the United States. Recently there has been a “change in tone in the media”, an official in Beijing conceded, and “more of a sense the dispute is escalating”.[11] Still, Beijing analysts are unanimous that China wants a deal.

Not only do both sides want a deal. The major elements of it have already been agreed. It is said in Beijing that only five people on each side of the negotiations ever saw the 150-page final English-language text presented by the United States in Beijing at the tenth negotiating meeting at the end of April. Both sides say the text codified the outcome of the talks thus far. Both sides say that the Chinese leadership then asked for changes when presented with a Chinese translation of the negotiator’s draft.

No one I spoke to in Beijing had seen the late April negotiating text, or cared to say so if they had. Yet while the draft agreement has been held tightly, a sense of its content is widely shared. Obstacles earlier in the negotiation are no longer spoken of as impediments to agreement. China industry subsidies appear to have been dealt with.[12] Intellectual property or so-called ‘forced technology transfers’, were hardly mentioned in a week of discussions with Chinese analysts. Nor were investment restrictions or the exchange rate regime or tariffs (penalty tariffs apart) cited as impediments. They have either been agreed or are near enough to agreement.[13]

Many of the more difficult demands the United States has made over the past year are no longer pressed. It would not otherwise have been possible for the talks to get as far as they have. One leaked US document from 2018 demanded China agree not to retaliate if the United States decided to reimpose tariffs on China in response to a US judgement that China was not fulfilling obligations under the agreement. That demand would be impossible for any serious nation to accept and must have been dropped. Equally unacceptable was the demand that the United States be able to embed officials in Chinese government agencies to supervise implementation of an agreement. That too must have been withdrawn if it was ever seriously proposed. Instead, there appears to be agreement that each side will maintain an office in the other’s capital to coordinate implementation. The elimination of these deal-breaking demands is telling.

During the negotiations, it has sometimes been said that the United States would require China to change the roles of the Chinese Communist Party, state economic planning, and state-owned industries in China’s economy. These issues were not mentioned in Beijing. They could not be in the draft final text, since the Chinese negotiators could not at any point have permitted the inclusion of changes so fundamental to China’s economic system.

The remaining issues, according to the Chinese side, are those outlined by China’s negotiator Vice Premier Liu He in a press conference following the collapse of the negotiations at the 11th session in Washington in early May. By inference these are the reasons the leadership rejected the draft agreement. Liu said the two sides had “reached important consensus on many aspects”, but China had three reservations that must be addressed. The first was that all penalty tariffs imposed over the past year must be abolished. The second was that the quantity of additional imports China commits to buy from the United States “should be realistic”, adding that a common understanding on volume in Argentina had been reached. The third demand was for a more “balanced” text because “every country has its dignity”.[14]

All three issues are really about enforcement. Removal of the penalty tariffs must be part of the agreement — they are after all the “starting point of the ongoing bilateral trade dispute”, Liu said in May.[15] But perhaps they do not have to be removed all at once. The United States likely proposes to remove the penalty tariffs only as China presents evidence it has complied with its undertakings. This difference on the schedule for the removal of tariffs may not be impossible to bridge. The United States may, for example, reserve the option of reimposing tariffs if it concludes that China has not carried through on its undertakings. There is room to negotiate a schedule for removal that each side can accept, even if ambiguous.

The dispute over the amount of additional purchases can also be bridged. It is not an issue of principle. Since the amount China will agree to purchase is the only leverage it has in this negotiation, China’s position is now probably that agreement to buy more US goods and services depends on the trade deal as a whole. China offered $200 billion a year for six years when Donald Trump and Xi Jinping met in Buenos Aires in December 2018. In Beijing it is said that the United States now wants $300 billion. China may have to buy a little more than it hoped, and the United States accept a little less.

The major outstanding issue preventing agreement between the United States and China is the wording of the ‘enforcement’ clauses. This is where dignity is offended. China thinks there are too many of these clauses and they are too negative, too explicit, too unequal, too humiliating. They make it abundantly clear that this is not an agreement between equals, with concessions on both sides. The view in Beijing is that many of the decisions on China’s implementation are to be made by the United States alone, which is a problem for China. One analyst close to official thinking said China “cannot sign a deal that damages the Party, the Government and the Leadership”, referring to the enforcement text.[16]

Given what is now at stake,  how far the United States and China have come and how close they are to agreement, there are pressures on both sides to compromise on enforcement. As Liu told reporters in May, “discussions have many times relapsed, many complications have emerged, this is all normal”.[17]

Huawei complications

It is certainly true that US action against Huawei adds an entirely new dimension of uncertainty to the trade negotiations. It enlivens China’s suspicion of officials within the White House and in the national security bureaucracy who want to decouple the US and China economies, preliminary to isolating China from other markets and damaging its economic power. One Beijing analyst supposed that the United States has decided that “in order to contain China, start with 5G”.[18] If the decouplers were the dominant influence in Washington, however, a negotiation would not have occurred at all. If they are attempting to spike a negotiation, China is sensible to not respond to the provocation.

It is not clear if the Trump administration is deploying the Huawei threat to put additional pressure on China, or if it is part of a separate offensive against China that the United States does not intend to negotiate at all. Trump has several times indicated that the Huawei issue could be folded into the negotiation and settled within it, suggesting it is not a separate offensive.[19] Importantly, Chinese analysts and officials I spoke to were reluctant to link Huawei with the trade negotiation. The inference is that China is not insisting the United States back off Huawei as a condition of reaching agreement on trade. The Chinese approach appears to be to deal with one problem at a time. Grave and portentous as it is, the Huawei dispute may not of itself prevent agreement on the trade and investment issues.

Both sides are under pressure to resume negotiations following the G20

While China is eager for a final agreement, at the same time there are pressures on the United States to negotiate. In promising to decide within the next few weeks whether to extend penalty tariffs to the rest of China’s goods exports to the United States, Trump has created a deadline that impels the United States to agreement as much as China. This tranche of imports includes the vast range of Chinese-made household goods. In a recent study, Federal Reserve Bank of New York economists estimate the cost of additional tariffs thus far at US$831 per household.[20] Trump proposes to more than double the value of goods on which the 25 per cent tariff is imposed, presumably more than doubling the cost to American consumers. China would respond to extended US tariffs by cutting down again on imports of soybean and other farm products.

Trump has already officially opened his own race for the Republican nomination and the presidential election next year. Without a deal, the president faces running through 2020 with rising prices on goods from China, no increase in China imports from the United States, an alarmed stock market, and troubles in farm states. It might not lose him the race but it is baggage he would rather not have. A ‘great’ deal would be better.

A deal might be completed soon, or things might get a lot worse before they get better. Although Trump and Xi will confer at the upcoming G20 Leaders’ Meeting in Osaka, Xi is clearly cautious of the risk of a humiliating dismissal by Trump. Even so, there could be an agreement to keep talking, postponing decisions about extending penalty tariffs and also postponing the effective date of banning US sales to Huawei. The two leaders are scheduled to meet again at the APEC summit in Chile in November. Once past the end of the year, a deal will be hostage to the presidential election in November 2020. If the polls are bad for Trump, the US side knows China may sit back and wait.

Even if a deal is done, it will go only to tariffs, China’s purchases of US goods, China’s investment liberalisation, and enforcement in China of intellectual property rights. There are now many other issues in the deteriorating economic relationship between the United States and China. How these other conflicts play out will be influenced by the way US business thinks about the China market, China’s ability to catch up to some key US technologies within a reasonable time, and the attitudes of other big players such as Europe and Japan. Without that first deal, however, it will be exceedingly difficult to find ways of negotiating other economic disputes, or containing the risks of global economic calamity.


[1] Confidential interviews with the author, Beijing, May 2019.

[2] Crucially, the restrictions will also prevent US citizens and businesses from engaging with Huawei in setting international standards. This would make the emergence of rival global standards inevitable, and force other countries to take unwanted decisions on whether to participate in standards setting consultations with Huawei.

[3] IMF, “Group of Twenty IMF Note: Finance Ministers and Central Bank Governors’ Meetings”, G-20 Surveillance Note, 8–9 June 2019, See also Jeanna Smialek, Jim Tankersley and Jack Ewing, “Global Economic Growth Is Already Slowing. The US Trade War Is Making It Worse”, The New York Times, 18 June 2019,

[4] Andrew Edgecliffe-Johnson and James Politi, “US Business Urges Trump to End China Trade War”, Financial Times, 18 June 2019, See also Daniel Rosen, Lauren Gloudeman and Badri Narayanan Gopalakrishnan, “Assessing the Costs of Tariffs on the US ICT Industry: Modeling US China Tariffs”, US Chamber of Commerce and Rhodium Group Report, 15 March 2019,

[5] US Bureau of Economic Analysis, Survey of Current Business, September 2018, Table 8. This number includes China and Hong Kong.

[6] Dan Strumpf, “Huawei Expects $30 Billion Revenue Hit from US Clampdown”, The Wall Street Journal, 17 June 2019,

[7] Hong Chen et al, “The Rise of Robots in China”, Journal of Economic Perspectives 33, Issue 2 (2019), 71–88,

[8] Akito Tanaka, “China in Pole Position for 5G Era with a Third of Key Patents”, Nikkei Asia Review, 3 May 2019,

[9] Ryan Hass and Zach Balin, “US–China Relations in the Age of Artificial Intelligence”, Brookings Institution, A Blueprint for the Future of AI series report, 10 January 2019,

[10] Cheng Ting-Fang, Lauly Li and Kensaku Ihara, “Foxconn Plans $9bn China Chip Project amid Trade War”, Nikkei Asian Review, 21 December 2018,  

[11] Confidential interview with the author, Beijing, May 2019.

[12] China appears to have affirmed a commitment to more promptly declare those industry subsidies that may require notification to the World Trade Organization. Arguing that the United States has not put its own subsidies on the table, China does not seem to have committed to remove subsidies more broadly.

[13] The exchange rate chapter of the negotiating text, for example, is said to commit both sides to refrain from manipulating their exchange rates for trade advantage. The US side probably began by wanting more but must have realised in the course of negotiation that it could not sensibly ask China to fix its rate against a floating dollar, nor yet insist the renminbi float in whatever direction and extent the market pleased.

[14] “Chinese Vice Premier Urges China–US Cooperation, Vows No Compromise on Major Principles”, Xinhua, 11 May 2019, Thank you to Harry Edwards for additional translation.

[15] Ibid.

[16] Confidential interview with the author, Beijing, May 2019.

[17] “Chinese Vice Premier Urges China–US Cooperation, Vows No Compromise on Major Principles”.

[18] Confidential interview with the author, Beijing, May 2019.

[19] Donald Trump earlier moved against the Chinese-owned ZTE, threatening to deny the US processors on which its business depends. The dispute was then settled, with ZTE paying a big fine for violating US sanctions against Iran and accepting US scrutiny of its activities. It may be the United States wants, as one Beijing analyst speculated, “a plea bargain from Huawei”. Quite how the Huawei offensive fits into the trade negotiation is not at all clear.

[20] See Mary Amiti, Stephen Redding and David Weinstein, “New China Tariffs Increase Costs to US Households”, Federal Reserve Bank of New York Liberty Street Economics (blog), 23 May 2019,


Photo by Kyodo News via Getty Images


Areas of expertise: Australian economic policy; monetary policy; international economics; banking