Trump and Xi: From Ceasefire to Lasting Deal?
December 3, 2018
On December 1, President Donald Trump and President Xi Jinping met at the G20 Leaders’ Summit in Argentina following months of rising tensions and tit-for-tat tariff retaliation between the United States and China. What resulted from the meeting can best be described as a ceasefire: President Xi agreed to purchase “a very substantial” amount of U.S. products to reduce China’s trade surplus with the United States, and President Trump agreed to a temporary pause on any tariff increases. The two countries intend to use this window to negotiate structural changes in China, aiming for completion “within the next 90 days.” However, observers should not expect a quick resolution to issues that have built up over decades.
Q1: What specifically did the two leaders agree?
A1: In an interview days before the summit, President Trump said, “The only deal would be, China has to open up their country to competition from the United States” and to curb its theft of U.S. intellectual property. Based on the White House statement issued on Saturday, the Trump-Xi meeting delivered neither, but it set up a negotiation that is intended to yield progress on both. In exchange for the United States agreeing to suspend tariff increases, China agreed “to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries” with Chinese purchases of U.S. agricultural products to start “immediately.”
In addition, according to the White House, the two presidents “agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed “within the next 90 days.” Making clear that the agreement represents a “pause” in tensions and not a resolution, the statement goes on to assert that if an agreement is not reached in 90 days, the 10 percent tariffs currently imposed on about $200 billion worth of Chinese imports into the United States will be raised to 25 percent. (The statement says nothing about imposing the new tariffs that had been threatened on the remaining $267 billion Chinese imports.)
The statement also reveals other elements of what surely was a wide-ranging discussion and negotiation leading up to the dinner. It features China’s agreement to designate Fentanyl as a “Controlled Substance”; and highlights the “great progress that has been made with respect to North Korea” toward de-nuclearization, including President Trump’s expression of “friendship and respect for Chairman Kim.” It also indicates President Xi’s openness to “approving the previously unapproved Qualcomm-NXP deal should it again be presented to him.” In all, the breadth of issues covered at the working dinner underscores the complicated and multi-dimensional nature of the U.S.-China relationship.
Q2: What are the near-term implications of the announcement?
A2: The agreement to maintain the current tariffs already in place, but not escalate to 25 percent nor impose new tariffs, avoids—for now—an additional hit to U.S., Chinese, and global growth. In its November 2018 forecast, the Organization for Economic Cooperation and Development (OECD) estimates that maintaining the tariffs already imposed, as conveyed by Saturday’s announcement, will lower output in the United States and China by 0.2-0.3 percentage points by 2021 relative to the baseline. (A “worst case” scenario including the current tariffs, new and increased U.S. tariffs, Chinese retaliation, and an associated confidence shock brings the total hit to U.S. GDP to more than one percentage point and more than 1.3 percentage points to Chinese GDP.) For China, Saturday’s announcement alleviates pressure on an economy already slowing due to the de-leveraging campaign and will also support the Chinese currency, at least in the near term. On net, the absence of new tariffs and the prospect of an off-ramp to de-escalate tensions has been received favorably by financial markets around the world.
Regarding the bilateral trade balance—arguably the metric President Trump cares about most—it is impossible to quantify the impact of Chinese purchases announced in Saturday’s announcement until the details are known. Last year, China’s trade surplus with the United States totaled $375.6 billion ($335.4 billion when services are included). This year, China’s surplus with the United States is on track to be the largest ever, due to the strength of the U.S. economy. By contrast, China’s current account (which covers trade in goods and services as well as income and transfer payments) is broadly in balance with the rest of the world. While Chinese purchases of U.S. goods may shift the bilateral balance, both countries’ overall balances with the rest of the world are unlikely to change meaningfully.
Q3: What are the prospects for the 90-day negotiation?
A3: The list of issues to be covered in the negotiation—forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services, and agriculture—is long and reflects a build-up of tensions that pre-date the Trump presidency. There is reason to believe China will use the 90-day window to make additional concessions. Days before arriving in Argentina, speaking before the Spanish parliament, President Xi announced plans to expand market access for foreign investors and increase protection for intellectual property rights, a message consistent with the one delivered by Vice Premier Liu He in Germany the day before. Both speeches came on the heels of news that Allianz of Germany and AXA of France—two of the world’s largest insurance companies—would be allowed to run wholly-owned operations in China. Removing joint venture requirements will be a big part of addressing market access and forced technology transfer concerns. But big questions remain regarding how much China is willing to do; whether any market openings will only benefit favored countries or companies; and especially for sensitive sectors like those covered by Made in China 2025, whether China will open to foreign competition at all or end policies such as subsidization that favor domestic industry.
On the U.S. side, Saturday’s announcement halts tariff escalation for now, but economic strains between the United States and China are only part of the story. Over the past two years, drivers of U.S.-China tensions have evolved from trade imbalances and market access concerns to more fundamental and divergent strategic interests, which are now spilling over into economic and trade policy. Many experts predict a period of weaker economic ties between the United States and China, what some experts have referred to as an “economic Cold War,” “de-coupling,” or a “commercial divorce.” The recently passed Financial Investment Risk Review Modernization Act (FIRRMA) and the related Export Controls Reform Act (ECRA) reform foreign investment screening and export controls, respectively, in the United States in such a way as to potentially discourage cross-border commercial engagement between the United States and China, particularly in sectors considered “emerging and foundational technologies” such as artificial intelligence. The interpretation and implementation of such legislation, as much as tariffs, will determine the future economic relationship between China and the United States.
Finally, it’s safe to say that negotiation outcomes will be heavily influenced by the participants, President Trump in particular. The more hawkish members of the administration seem to doubt that fundamental agreement with China on the rules of the road can be reached, and even if an agreement were reached, it would not be respected. That backdrop puts additional pressure on China to make concessions in 90 days that years of traditional negotiations failed to deliver.
Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Stephanie Segal is deputy director of and a senior fellow with the CSIS Simon Chair in Political Economy. Megan Waldo, CSIS Simon Chair research intern, contributed to this Critical Questions piece.
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