Here’s how the U.S.-China trade war could end – POLITICO
President Donald Trump and Chinese President Xi Jinping could meet in Japan next month to resolve the escalating trade war between the world’s two largest economies. Negotiations during the weeks leading up to that meeting will determine whether a deal is possible.
Here’s what each side wants, and what could happen if they don’t get it.
What the U.S. wants:
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A victory for President Donald Trump is a deal that reduces the trade deficit with China and requires Beijing to change practices that block U.S. exports from reaching the Chinese market and require U.S. companies to hand over valuable technology to do business there.
The Office of the U.S. Trade Representative laid out its criticisms of those policies last year, prompting Trump to impose a 25 percent duty on $50 billion worth of Chinese goods.
Trump’s trade office accused Beijing of conducting and supporting cyberattacks on U.S. company computers in order to acquire valuable intellectual property and other sensitive commercial information.
It also accused China of aggressively supporting investment by state-owned or state-directed companies in the United States to secure access to cutting-edge technology in sectors such as aviation, integrated circuits, information technology, biotechnology, industrial machinery, renewable energy and automobiles.
Administration officials also want China to rein massive government subsidies, including at the local and provincial level, that encourage overproduction and give Chinese state-owned enterprises an advantage over American companies.
Trump ratcheted up pressure on Beijing in Sept. 2018 by imposing a 10 percent duty on an additional $200 billion worth of Chinese goods, which he increased last week to 25 percent. He’s also proposed to hit almost all remaining Chinese goods with a 25 percent tariff if no deal is reached. That would affect about another $300 billion worth of products, including Apple iPhones, clothing, shoes and many other consumer products.
For its part, China has retaliated by imposing duties ranging from 5 to 25 percent on $110 billion of American exports, including many agricultural goods, chemicals, seafood and manufactured products.
Trump not only wants Beijing to remove that retaliation, but to increase its purchases of American goods to reduce the U.S. trade deficit with China, which hit a record $419 billion in 2018.
U.S. Treasury Secretary Steven Mnuchin has spoken of $1.2 trillion in additional Chinese purchases over a number of years, but Trump is believed to want an even bigger number that he can tout on the campaign trail.
Due in part to the tariffs Trump has imposed, the U.S. trade gap with China narrowed to $80 billion in the first quarter of 2019, compared to $91 billion in the same period last year.
Over the longer run though, a reduction in the trade deficit with China could lead to a widening in the trade gap with all other countries as U.S. companies will simply get supplies elsewhere.
What China wants:
A victory for Chinese President Xi Jinping is a deal that eliminates — or significantly reduces — the 25 percent tariff Trump has imposed on $250 billion worth of Chinese goods and stabilizes U.S.-China economic relations, without making changes to China’s system that would jeopardize his standing as the country’s paramount political leader.
Xi’s chief negotiator, Chinese Vice Premier Liu He, outlined China’s priorities for a deal last week after Trump moved forward with increased tariffs on Chinese goods.
First, the duties imposed by the two sides must be totally revoked in order for the two sides to reach a deal, Liu said. That clashes with a U.S. goal to keep some duties until China has shown it has honored certain commitments.
Second, Liu said, the amount of additional goods that China buys from the United States must be realistic and based on the consensus that Trump and Xi reached at a dinner meeting in Buenos Aires, Argentina, in December 2018.
Lastly, Liu said, the agreement must be “balanced” and respectful of China’s dignity as a nation, instead of a one-sided pact that only addresses U.S. concerns. However, since the United States has the bigger demands in the negotiation, it could be difficult to strike a deal that is perfectly symmetrical.
What’s a “win-win” deal:
In most trade negotiations, both sides “win” by increasing overall trade and investment between the countries involved in the negotiations.
But in the case of the U.S.-China talks, “the deal necessarily will have many zero-sum elements that will re-distribute benefits away from China or other countries and toward the United States,” Scott Kennedy, a China expert at the Center for Strategic and International Studies, said in an email from Beijing, where he was visiting this week. “Nevertheless, there are common benefits if you take a longer-term perspective.”
A stable commercial relationship would allow Xi to refocus his attention on domestic priorities, while reducing the uncertainty American companies now face.
A deal that requires China to change its laws and open its market to more foreign competition would hurt some entrenched Chinese interests. But it also could create a more competitive environment that would be beneficial to stronger Chinese companies and raise productivity and overall economic growth.
“On purchases, the Chinese wouldn’t mind locking in long-term supplies of natural gas and aircraft, but they don’t want to make commitments on purchases that they can’t be sure they’ll need,” Kennedy said.
The two presidents would also be able to both take credit for a big deal, which would strengthen their domestic political positions, he said. That’s important for Trump as he gears up for his 2020 reelection bid and for Xi as he presses ahead with plans to serve a third term as president and leader of the Chinese communist party.
What happens if the stalemate continues:
Already, affected industries are complaining loudly about both the tariffs that Trump has imposed on Chinese goods and Xi’s retaliation on $110 billion of American exports. Those protests will get louder if Trump follows through on plans to tax the remainder of Chinese exports — another $300 billion or so — at 25 percent.
In addition, many Democrats and business groups argue Trump could have been more effective in persuading China to change by working with key allies like the European Union and Japan, instead of going it alone.
If Trump reaches no deal at all and leaves tariffs in place, he will have raised costs for consumers and businesses without achieving any of the goals that prompted him to raise tariffs on Chinese goods in the first place.
However, it’s possible that Trump could delay a decision on imposing more tariffs if he is concerned that would cause a stock market slide or harm economic growth and his chances of winning reelection in 2020.
What happens in an all-out trade war:
If talks fall apart and Trump moves forward with slapping 25 percent tariffs on everything that China exports to the U.S., he could further rattle markets, tip the economy toward recession and lose his best ticket to reelection.
It’s not entirely out of the question, as Trump expressed high confidence in his approach. “We’re in a very good position and I think it’s only going to get better,” Trump said of the trade fight so far. “We’re taking in tens of billions of dollars [in tariff revenue], I think it’s working out very well.”
China could increase its retaliation from the duties already announced on $110 billion worth of American goods to include some additional items not currently covered, such as Boeing aircraft.
China also has numerous other ways it could inflict pain on the U.S.’ economy — such as by not purchasing energy, restrict services trade and inflicting pain on the Treasury markets. All those measures would also have ramifications for China’s economy as well.