Published daily by the Lowy Institute

Trump and Xi need a trade deal and they need it soon

With the US election looming, the window for an agreement is closing – yet the two sides are closer than often assumed.

Donald Trump and Xi Jinping during talks at the Osaka G20 in Japan (Photo: Brendan Smialowski via Getty)
Donald Trump and Xi Jinping during talks at the Osaka G20 in Japan (Photo: Brendan Smialowski via Getty)
Published 23 Jul 2019 

With resumed contact between US trade negotiator Robert Lighthizer and China’s negotiator Vice Premier Liu He, the 12th round of trade talks between the US and China may take place in Beijing before the end of July. But the clock is now ticking very loudly. Contrary to the messaging from Beijing and Washington, both US President Donald Trump and China’s President Xi Jingping need a deal – and they need it soon.

Trump knows that, with a deal, China will buy more than a trillion dollars in additional exports from the US. Other than the corporate tax cuts in 2017, it would be the biggest policy win of his first term. Without a deal American consumers will be hurt by the extension of 25% tariffs to another $325 billion imports from China, this time on the kind of household goods where voters will notice higher prices. American farmers will be hit again by reduced exports to China.

In a typical trade negotiation, the two sides would at this point be looking for compromises.

For his part Xi needs a deal not only because US tariffs are hurting China’s exports, but also because he knows that the longer this quarrel continues the more China-based manufacturers for the US market will have to move production to Vietnam and Malaysia.

Both know that unless there is a deal by the end of the year, the talks will be hostage to an unpredictable US presidential election campaign. Trump’s opponents, Democrat and Republican, portray themselves as even more hostile to China than the President, constraining his freedom to accept a deal.

Both also know that continuing the trade quarrel is of no advantage to either side. In the first five months of this year China’s goods exports to the US were down 12% compared to the same period last year. US goods exports to China were down even more, by 19%. The US bilateral trade deficit with China accordingly increased. That is not what the White House had in mind in initiating the quarrel a year ago.

Trump knows the risk of putting more tariffs on the kind of household goods where voters will notice higher prices (Photo: PughPugh/Flickr)

If this chance of a deal passes it will be a long time before there is another. By then the quarrel may be very much harder to resolve, and the impact on the global economy more damaging and more extensive. On a new round of talks, therefore, much depends

The problems are formidable but not insuperable.

The US wants a deal in which China buys at least $200 billion a year more in imports from the US, while signing up to tighter rules on intellectual property, foreign investment and trade related subsidies. For its part China can can go along with much of what the US wants but in return wants the 25% penalty tariffs imposed on $250 billion of China’s exports to the US removed. China probably also wants the US to pull back on sanctions on China’s high technology businesses, such as Huawei.

As I argued in a Lowy paper last month (Averting a global calamity: Trump and Xi at the G20), despite the generally pessimistic assessment in both Washington and Beijing, the surprise of the 11 negotiating sessions so far is how close to final agreement the two sides now are. Visiting them in Beijing, analysts and officials had little to say about the issues everyone discussed a year ago – intellectual property protection, forced transfers of intellectual property, investment rules or tariff levels (other than the penalty tariffs each has imposed on the other). The issue of subsidies is unclear but otherwise the substantive issues are agreed, or close to agreement. They are covered in the draft agreement presented by the US side in April. Importantly, earlier US demands, impossible for China to accept, appear to have been dropped.

Both sides appear to have moved (Photo: Brendan Smialowski via Getty)

On some of the issues in dispute China has already moved. The March National People’s Congress for example legislated to give foreign firms equal access to incentives as domestic firms (“national treatment”), to tighten intellectual property protections, and to replace discretionary approvals of foreign investment with a list of those industries in which foreign investment remains barred (a “negative list”).

The remaining big disagreements in the trade negotiation are about enforcement. China wants the penalty tariffs removed with the agreement; the US wants to keep them on until it is satisfied China is observing the agreement. China is willing principle buy an additional $200 billion in imports from the US each year, but not until everything is agreed – including removing those penalty tariffs imposed by the US on China over the last year. The US is said to want China’s commitments legislated by China; China says it will make its laws, not the US. They are important disputes, but are they so intractable they can prevent a final agreement both sides need?

In a typical trade negotiation, the two sides would at this point be looking for compromises.  For example, in the deal China might agree to buy an additional $200 billion plus from the US each year, for a minimum of six years, but perhaps not reaching the maximum annual rate until all US penalty tariffs are removed. The US might agree to remove penalty tariffs, on a schedule which would see them removed completely within a year or so. During that period China would implement requirements of the agreement. Meanwhile the US would not impose further tariffs. Huawei would as today be denied only those US products relevant to national security.

It will be able to win very specific and public assurances but the US must be aware it is unlikely to win a right to approve or disapprove China legislation implementing any agreement. No serious nation could accept this. When the US asked to inspect Australia’s proposed legislation implementing the 2004 US-Australia free trade agreement before it had been submitted to the Australian parliament, the Howard government refused.

If there is to be a deal at all before the presidential race takes over, it needs to be in place when Trump and Xi meet at the APEC leader’s summit in Santiago, Chile, in mid-November.  A meeting between the two leaders on the sidelines of the UN General Assembly in September could help push things along.

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