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A China-U.S. Trade Armistice Could Enshrine A Global Economic Shift

The spin from President Trump and China’s propaganda machines on Saturday portrayed a truce in a trade war that has shaken economies and markets around the world. Tariffs won’t rise further, at least not yet. And the United States will loosen its potentially devastating punishments against Huawei, China’s most successful multinational company.

Yet the outlines of the tentative peace accord President Trump reached on Saturday with his Chinese counterpart, Xi Jinping, could further cement a broad reshuffling of the global economic order that undermines China’s decades-long role as the world’s factory floor.

The details of the discussions between Mr. Trump and Mr. Xi on the sidelines of the Group of 20 summit in Osaka, Japan, still are not clear. The two sides have agreed to resume talks, but the ultimate results are not guaranteed. Their differences could still derail a fragile peace in an economic conflict that has thrown a shadowover the outlook for global growth.

Even a fragile truce could have lingering implications. The United States would keep in place broad tariffs on Chinese goods for months or perhaps years to come. Global companies would almost certainly respond by continuing to shift at least the final stages of their supply chains out of China.

“As long as the threat is out there, there are risks in depending on these long supply chains,” said Jacques deLisle, director of the Center for the Study of Contemporary China at the University of Pennsylvania. “Businesses don’t like uncertainty, and this prolongs the uncertainty.”

In that regard, the results of the Osaka talks are similar to those when Mr. Trump and Mr. Xi met in Buenos Aires on Dec. 1, resulting in a truce that left in place higher American tariffs on Chinese-made goods. That truce lasted until May, when the Trump administration accused China of backtracking on a partially completed agreement that would have replaced tariffs with broad structural changes in the Chinese economy.

Leaving tariffs in place for the indefinite future has long been seen as the second-best solution by both sides. The Americans want fundamental economic policy changes in China, where the government heavily subsidizes local rivals to American companies.

Beijing officials want the tariffs dropped entirely. But they refuse to overhaul an economic model based on industrial subsidies and state-owned enterprises that they see as successful in lifting hundreds of millions of people out of poverty over the past four decades.

For China, the Osaka talks represent a short-term success. Mr. Trump postponed new tariffs on roughly $300 billion a year in Chinese goods that he had threatened to impose at some unspecified date if Beijing did not come back to the negotiating table. He also said he would weaken limits his administration had imposed on the American technology that Huawei could use, without offering specifics. Those limits cut off the Chinese telecom equipment giant from the semiconductors and other technologies it needs, a shopping list that the company has said totals $11 billion annually.

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Perhaps most important, China has persuaded the United States to return to the bargaining table without agreeing to any of the legislative changes that the Trump administration saw as essential, but which Beijing regarded as an affront.

“China will not concede its sovereignty and show weakness,” said Zhu Ning, a prominent economics professor at Tsinghua University in Beijing.

But an accord does little to reduce the trade barriers Mr. Trump has already erected. Last summer he put 25 percent tariffs on $50 billion a year in Chinese imports in crucial industries like car-making and the manufacturing of parts for nuclear reactors. Then he put 10 percent tariffs on $200 billion worth of a broader array of Chinese imports. In May, he raised tariffs on that latter set of goods to 25 percent.

An advertisement for Huawei, the Chinese telecommunications equipment giant, in Shanghai.

In response, an array of companies, from shoemakers to electronics manufacturers, are moving their supply chains out of China. Many companies have been shifting that final assembly to Vietnam, producing a surge in American imports from Vietnam this year even as American imports from China have begun to falter.

“What this has shown is there is massive uncertainty, and we’re not going to go back to the way things were,” said Wendy Cutler, a former American trade official who is now a vice president of the Asia Society Policy Institute.

This shift will not happen overnight. China remains a manufacturing colossus with vast supply chains and a skilled labor force. Even those companies that continue to move final production out of China are continuing to buy Chinese-made components, particularly in electronics, a sector that China dominates. Despite the worsening trade tensions of recent weeks, Apple is planning to move production of a line of powerful personal computers to China from the United States.

“Uprooting an entire supply chain is a nightmare task,” said Jon Cowley, an attorney in the Hong Kong office of Baker McKenzie, a global law firm, who advises corporate clients on tariffs and supply chains. “It takes years, if not decades.”

President Trump warned this past week that he was concerned about the influx of goods from Vietnam. The surge could invite scrutiny from the Trump administration if it believes that companies are pretending to make products outside China but are simply clipping together Chinese-made parts.

Still, China has few options to stop those shifts. Trade between the two countries is so lopsided that China has many fewer American imports to tax. It could slam American companies that sell vast amounts of products in China, like Apple or General Motors, but pinching those companies could hurt the Chinese workers who make those products.

Its strategy so far has been to target agricultural goods from states that Mr. Trump would need to win if he hopes to be re-elected in 2020. The strategy has worked. American farmers have suffered from a loss of sales to China and have been urging the White House to resolve the trade war. To help cushion the blow, Mr. Trump rolled out two rounds of financial support to help subsidize the farmers. But China’s dangling of agricultural purchases in front of Mr. Trump appeared to once again persuade the president to back off from his bigger threat, saying farmers “are going to be a tremendous beneficiary.”


On Saturday, Mr. Trump said China had agreed to resume purchasing some of the farm goods and other products that it has not been buying lately in retaliation for the American tariffs. “China is going to be buying a tremendous amount of food and agricultural product and they’re going to start that very soon, almost immediately,” Mr. Trump said in remarks in Osaka. “We’re going to give them lists of things we would like them to buy.”

Mr. Trump’s position could change if the American economy slows or if financial markets take a hit. While the trade war may be popular among Mr. Trump’s base and in some parts of manufacturing swing states, and resumed farm purchases could improve its image, it is disliked by the electorate at large.

Even then, leaders from both major American parties have indicated that the United States could continue to take a tough line on China no matter who is in the White House. The attitudes toward Huawei, in particular, show an appetite on both sides of the aisle for taking a tough line. Mr. Trump on Saturday said he would allow American companies greater leeway in selling their products to the Chinese telecom giant. His comments provided little clarity on which companies might be able to resume sales. The technology industry has argued that it should be able to sell products to Huawei that do not pose a threat to national security.

Those comments were already drawing skepticism on Saturday. In a statement, Senator Chuck Schumer of New York, the Democratic leader in the Senate, called Huawei “one of few potent levers we have to make China play fair on trade.

“If President Trump backs off, as it appears he is doing, it will dramatically undercut our ability to change China’s unfair trade practices,” he said.

American officials have portrayed Huawei to United States allies as a potential security threat, in an effort to get them to turn elsewhere for advanced telecommunications equipment. Huawei has denied that it represents a security threat to any company.

“Even if they try to thread the needle here on how they implement whatever Trump has decided, his message alone seriously undercuts the efforts put in to try and persuade our allies to join us,” said Laura Rosenberger, a senior fellow at the German Marshall Fund, a think tank.

Source: Nytimes


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