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US-China trade: How dose of reality is pushing both sides to deal

Why We Wrote This

During 2018, bravado and self-assurance fostered rising tensions over trade for the world’s two largest economies. Things are shifting as both sides see the risks of a trade war.

Ng Han Guan/AP
Customers visit an Apple store in Beijing on Jan. 3. Apple Inc.’s $1,000 iPhone is a tough sell to Chinese consumers who are jittery over an economic slump and a trade war with Washington. The tech giant became the latest global company to cite weakening consumer demand in the world’s second-largest economy.

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Prospects have brightened that a 90-day bargaining push between the United States and China could succeed. The reason: Contrary to a tweet by President Trump 10 months ago that trade wars are “good,” evidence is mounting that souring ties are hurting both economies, especially China’s. The result is some momentum in long-stalled talks. After midlevel negotiations in Beijing were extended unexpectedly to a third day this week, Beijing’s chief trade negotiator is preparing to travel to Washington for higher-level talks. An easing of tensions could help the whole world economy. But it won’t be easy to close rifts that stem from very different economic strategies. The US is focused on ending unfair practices by China and reducing the US trade deficit. China’s priority is using trade as a tool in its push for rapid technological development. Wendy Cutler, a former trade negotiator, says “There is an incentive for both sides to reach an agreement, but I don't think that means that they're willing to reach an agreement at any cost.”

It’s been 10 months since President Trump shocked the world with a tweet saying that trade wars could be “good, and easy to win."

Lately, evidence has been accumulating suggesting just the opposite. Tariff Man, as the president described himself in a tweet a month ago, is looking much more like Trade Negotiation Man. And Chinese officials appear less assured that they can weather the two nations’ nascent tariff war.

Why?

Economic pressures. Specifically, US stock markets plunged before Christmas, followed by a warning of slowing revenues from bellwether tech giant Apple. And China’s economy showed signs of deterioration in December, with both factory output and retail sales weakening. Both were caused, in part, by existing tariffs and fears that there were more to come. And they are pushing Washington and Beijing to reach a deal.  

“Both sides are finding out that trade wars are painful,” writes Mary Lovely, professor of economics at Syracuse University, in an email. “The Chinese economy is slowing…. Foreign investment into the US is down, and there is concern about domestic investment moving forward.”

For Mr. Trump, the key barometer is the US stock market. When it plunged last month, in part because of concerns about a potential trade war with China, that reportedly got the president’s attention. Since then, he has been sounding increasingly positive about US-China talks, and Wall Street has soared from its Christmas Eve low.

Trump may also be feeling he has fresh leverage in talks that stalled last year at a time when officials in China appeared more confident of their own economy’s resilience to a trade storm. Now, rougher economic performance there seems to have changed the mind-set.

“I think China wants to get it resolved. Their economy is not doing well,” Trump told reporters Sunday. “I think that gives them a great incentive to negotiate.”

After midlevel negotiations in Beijing were extended unexpectedly to a third day this week, Beijing’s chief trade negotiator is preparing to travel to Washington for higher-level talks. Those could come as early as the end of this month, US Treasury Secretary Steven Mnuchin said.

A good kind of ‘kicking the can’?

Such signs are considered positive.

“It clearly looks like important progress was made as a result of these three days of talks, particularly on issues related to increased purchases [of US goods by China] and maybe some market access” of US firms to Chinese markets, says Wendy Cutler, vice president of the Asia Society Policy Institute and a former trade negotiator. “There is an incentive for both sides to reach an agreement, but I don't think that means that they're willing to reach an agreement at any cost.”

Trade experts say the first step is to reach some kind of deal by March 1 that makes advances in these areas, delays further US tariffs on Chinese goods, and includes a concrete agreement to continue talks on the more difficult structural trade issues that separate the two nations. The administration has threatened that in March it would escalate US tariffs from 10 percent to 25 percent on $200 billion of Chinese goods.

Getting a deal and at least delaying an escalation in tariffs could be a positive, even if it kicks the can down the road on the more difficult issues.

“I can see a good can-kicking scenario and a bad can-kicking scenario,” says Edward Alden, a senior fellow at the Council on Foreign Relations in Washington. “A good can-kicking scenario is that the administration recognizes this is not a three-month negotiation; it's a three-year negotiation or a 10-year negotiation…. It becomes the beginning of an ongoing negotiation between the United States and China to try to figure out ‘Look, how are the two biggest economies in the world going to reconcile their different systems in a way that allows for greater global stability and prosperity?’ ”

He adds: “A bad [scenario] is you get a weak deal, you declare victory, and and then everybody looks the other way.”

Differing goals for trade

The problem with a face-saving deal is that it would allow a festering of tensions caused by the mismatch in strategic aims between the two nations.

For the US, more balanced trade and level playing fields are the end goals. For China, trade is a tool in its push for rapid technological development and parity with the West. That is why Beijing has been willing to disregard trade rules when it heavily subsidizes certain strategic industries, violates intellectual property rights, and engages in cybertheft to acquire certain Western technology.

Such issues are especially fraught because US officials have been insisting on measures to verify Beijing’s compliance with the promises it makes.

Some trade experts say it’s encouraging that Trump has given charge of the negotiations to Robert Lighthizer, the US trade representative and someone known for pushing for substantive reforms.

“Why trade is fascinating right now is that Trump cares enough about it that he put a serious guy in charge, and therefore we have the possibility of a serious outcome,” Mr. Alden says.

If both sides succeed with an interim deal by March 1, it would take away some of the uncertainty in world markets and lessen US-China tensions, though not eliminate them, says Ms. Cutler. If talks fail, “we'd quickly feel the repercussions. China would feel the repercussions. China would counterretaliate. And I think the global economy would just take a big hit.”

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