I am currently looking wrong on the U.S.-China trade dispute. The view here had been to expect a deal on trade between U.S. and China because of Donald Trump’s well-established practice of looking for a “win”.
While lingering hopes of a deal should not be completely abandoned so long as there is a chance for Trump and President Xi Jinping to meet at the G20 Summit due to be held on June 28-29 in Osaka, it remains the case, as previously written here, that if Washington insists on too aggressive and formalized an enforcement mechanism, it will be a deal breaker. This is because this is a bilateral negotiation, which would imply that such an enforcement mechanism would amount to China subordinating itself to the demands of a U.S. compliance officer. This is clearly a deal breaker for cultural reasons from Beijing’s perspective.
US Trade With China (Goods)
Source: US Census Bureau
What Happened to the Trade Negotiations?
It has been evident for some time, and at least for the past four months, that the basic principles of a deal had been agreed between the two sides and that the tricky point was agreeing on some sort of enforcement process that did not offend China’s cultural sensitivities.
Clearly, the Donald smashed such expectations dramatically with his tweet issued on May 6 where he said that the tariff on US$200 billion worth of imports from China would be raised from 10% to 25% on May 10.
What caused the last moment U-turn? The guess here is that Beijing moved the goalposts a little at the 11th hour and this gave the hardliners in Washington the opportunity they were looking for anyways to scupper the deal.
Certainly, Washington’s reported demands that China should pass laws to entrench the changes negotiated in the deal are absurd given the nature of the Chinese political system where administrative edicts are what matter, not legislation.
The Political Winds are Shifting on China Deal
The issue has now become whether the political calculus has changed for the Donald. Previously, it seemed that a “win” on a trade deal with China, where the 45th American President could legitimately argue that he had secured a better deal than any of his predecessors since China was allowed into the WTO in 2001, would be very much in Trump’s political interest.
But now with anti-China sentiment still surging on both sides of the political aisle in Washington, there is a risk that the Donald believes that it has become a potential risk politically being seen to be too soft on China in the coming presidential campaign, which is ironic given that Hillary Clinton was essentially the candidate for free trade in the 2016 presidential election.
I’m not yet willing to give up completely on the prospects for a deal, and it remains clear that Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow want one. Still, the chances are looking increasingly bleak, with the atmosphere further strained by the Trump administration’s renewed focus on Huawei, despite the three-month reprieve granted on May 20 to the ban on U.S. companies doing business with Huawei.
A Potential Tech War to Add to the Troubles
For the record, Trump issued an executive order on May 15 that enables America to ban telecommunications equipment and services from “foreign adversaries”. While the Commerce Department added on the same day Huawei and its affiliates to its “Entity List”, meaning that companies are required to obtain a license to sell American technology to Huawei. Importantly, the U.S. order covers the supply of both hardware and software to Huawei.
The above has created concerns about a “tech war”, as well as a trade war. This shows the renewed influence of the national security lobby inside the administration, as does the renewed bizarre obsession with Iran. All this is somewhat ironic given that nothing in Trump’s record suggests he is a national security hawk. Yet on occasion experience has shown he can clearly be manipulated by these people. Though it must also always be remembered that the Donald can turn on a dime.
If the current trajectory of events is maintained, and there is no deal between the U.S. and China by the G20 Summit, it is clearly fundamentally bearish for the world economy at large; though the impact will clearly be much more negative if Trump follows through on threats to levy 25% tariffs on the remaining US$325 billion of U.S. imports from China that are not taxed, most of them in the consumer products area. The latter will escalate concerns on the American economy, and also potentially lead to a short-lived inflation scare.
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