Commentary | 28 June 2019

Why Trump and Xi will do a deal

Originally published in the Australian Financial Review

Originally published in the Australian Financial Review

It may or may not promptly follow the  meeting between Presidents Trump and Xi, but sooner or later trade talks between the US and China will likely restart.

These two economic giants are now too close to a deal, the consequences of failure are too exorbitant, for either of them to refuse to re-engage. Yet the remaining difficulties to agreement should not be underestimated – or the value of agreement overestimated.

While hard-line decouplers in Washington may not want a deal, US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and President Donald Trump behave as if they do.

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.

Without a deal, the President faces running through 2020 with sharply rising prices on goods from China, no increase in China imports from the United States, an alarmed stock market, and troubles in farm states. A "great" deal would be better

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. Visited recently in Beijing, analysts were unanimous that China very much wants a deal.

Not only do both sides want a deal, the major elements of it have already been agreed. Mnuchin says the deal is "90 per cent done". China’s negotiator, Vice-Premier Liu He, says the two sides have “reached important consensus on many aspects” of the negotiation.

Both sides say the 150-page text presented by the United States in Beijing at the tenth negotiating meeting at the end of April codified the outcome of the talks thus far. It includes investment, subsidies, intellectual property, tariffs in certain products, and the exchange rate. These were major issues and all have either been agreed or are near enough to agreement.

Under the agreement China will cease to require foreign businesses to transfer technology to Chinese partners. American businesses will be able to compete in China in some areas previously impeded, such as payments. Some subsidies now available only to Chinese firms will be made available also to foreign firms. China will reduce some tariff levels. It will buy something like $US200 billion more in imports from the US each year.

Many of the more difficult demands the United States has made over the past year are apparently no longer pressed. It would not otherwise have been possible for the talks to get as far as they have.

There are three remaining issues. China wants the penalty tariffs imposed over the past year lifted more rapidly than the Americans want. China wants to buy less additional imports from the US than the US is now seeking. And China wants a more “balanced” text, Lui told a May press conference, because “every country has its dignity”.

Limited range of issues

All three issues are really about enforcement. If both sides want a deal, all are capable of being resolved. Removal of the penalty tariffs must be part of the agreement, for example, but perhaps they do not have to be removed all at once. The dispute over the amount of additional purchases can also be bridged. China may have to buy a little more than the $2US00 billion a year it earlier offered, the United States accept a little less than the $US300 billion it is said to want.

China’s dignity is offended by the wording of the "enforcement" clauses. If the negotiations are now to fail, they will likely fail on the explicitness of enforcement language. Yet given what is now at stake, given how far the United States and China have come and how close they are to agreement, there are big pressures on both sides to overcome this final barrier to agreement.

It is certainly true that US action against Huawei adds an entirely new dimension of uncertainty to the trade negotiations. One Beijing analyst supposed that the United States has decided that “in order to contain China, start with 5G”. But there was a sense in Beijing that, grave and portentous as it is, the Huawei dispute may not of itself prevent agreement on other trade and investment issues.

Even if a deal is done in coming months, it will go only to a limited range of issues. There are now many other problems in the deteriorating economic relationship between the United States and China. But without that first deal it will be exceedingly difficult to find ways of negotiating other economic disputes, or containing the risks of global economic calamity.