We have reached the end game in the trade war

We have reached the end game in the trade war
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President TrumpDonald John Trump2020 Democrats spar over socialism ahead of first debate Senate passes .5 billion border bill, setting up fight with House 'Teflon Don' avoids the scorn of the 'family values' GOP — again MORE tweeted out on Sunday what sounds like good news: Based upon "substantial progress" in trade negotiations with China, he was postponing a March 2 increase from 10 to 25 percent tariffs on some $200 billion in U.S. imports from China. 

The president even declared expectations of further progress and a “signing summit” at Mar-a-Lago, perhaps as early as March. Major markets around the globe flashed green, signaling optimism that the results might yet be worth the economic disruption and uncertainty caused by the U.S.-China trade war. 

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It is true that both sides face pressure — economic and political — to reach a deal. But all we really know for now is that President Trump sees enough momentum in the talks that hiking tariffs at this time would slow not spur progress. 

If more progress toward a credible, enforceable and verifiable agreement is not made, he can always deploy the tariff hike.

Let’s be clear, this is the end game; the stakes are high for both Presidents Trump and Xi. Signs and sentiment are mounting that the U.S. economy could fall into a recession before the 2020 election.

To make good on his big promises and to bolster the U.S. and global economy before the election, President Trump needs a deal that is a fitting conclusion to a year-long trade war with China. A year of economic disruption, and Trump’s own words, have raised expectations for a robust, comprehensive agreement.

That means not just promises from China to buy up to $1.2 trillion more energy, agricultural products and other products from the U.S. to reduce our persistent trade deficit with China but:

  • verifiable improvements on intellectual property protections,
  • cyber-theft,
  • forced technology transfers,
  • non-tariff barriers,
  • market access for U.S. services companies and
  • other key “structural issues.” 

Xi, too, faces real challenges: Last year, China’s economic growth slowed to a three-decade low, as public and private debt mounts and traditional drivers like real estate and infrastructure weaken. 

China’s economy has gone through a fundamental change in recent years — from an investment- and export-led one to a consumption-based economy. These changes are hard to manage and control. 

In January, Xi warned hundreds of abruptly-assembled party officials that: “Globally, sources of turmoil and points of risk are multiplying,” and, “the party is at risk from indolence, incompetence and of becoming divorced from the public.” 

Economic risks are a huge concern for Xi, who sees the potential in 2019 for restlessness at home, including if the trade talks blow up and slow growth even further. If that happens, China’s debt levels, its tightly state-led economy and global conditions will constrain his ability to respond. 

A deal that de-escalates the trade war with the United States would boost flagging business and consumer confidence in China and enable Xi’s government to train its focus on reining in debt and financial risks. Moreover, some in the party do see a need to accelerate and deepen economic liberalization. 

Xi is interested in control, not liberalization, but he could use the trade talks to ease criticism both of his handling of the economy and of China’s relationship with the United States. 

Locking down verifiable specifics on the structural issues and agreeing on enforcement mechanisms, however, remain far from done. China still denies it ever forces technology transfers or steals trade secrets via cyber-theft. 

Additionally, China most certainly does not want to U.S. to be able to decide unilaterally when and if China has failed its commitments and to snap back into place high tariffs. On the other hand, the U.S. is unlikely to agree to any independent arbitration mechanism. 

China fears that the U.S. is using the trade talks and other measures to slow its technological progress, not just to prevent it from stealing know-how and using massive subsidies and non-tariff barriers to unfair advantage. 

Meanwhile, the U.S. has for years seen China bend or circumvent rules, commitments and agreements and has accumulated hard evidence of China’s unfair practices and the economic harm they have caused the U.S. 

Yet, achieving dominance in 10 high-tech sectors (e.g., aerospace, robotics, artificial intelligence, semiconductors and autonomous, clean-energy vehicles) is the centerpiece of Xi’s 2015 “Made in China 2025” strategy. 

The policies and practices that the United States and other trading partners have criticized as mercantilist are core elements of China’s efforts to expand into these high-tech sectors, sectors that are also strategic to future prosperity in the United States. 

This highlights the sensitivity of the current negotiations. The future economic strength of both countries is at stake, as is the degree to which the U.S. and China view their relationship as a zero-sum game or one in which mutual benefit and cooperation are possible and necessary. 

The credibility of both leaders is also on the line. While the stakes are very high, trust is low. For China to take the risk of liberalizing during such a major economic transition, the U.S. should give China some certainty on tariff relief if China is implementing the agreement in good faith. 

It remains to be seen whether President Trump can reach a deal with President Xi that is “better than any deal that anybody ever dreamed possible.” Failure to reach a deal seems unlikely, given what is at stake for both leaders. 

They could well agree on stabilizing China’s currency and increasing its purchases from the United States to reduce our trade deficit, as well as on market openings and intellectual property protections that are in China’s own interest, along with some intermediate steps on the thorny structural issues. 

There are several directions the Trump administration could go on tariffs in the context of an agreement. One is to keep the existing 10-percent tariffs on Chinese imports until China fulfills its commitments. Another is to lift right away some or all of the current tariffs, with the threat that the tariffs would “snap back” into place if China does not meet its commitments. 

In either case, the administration could retain the threat of new tariffs, like those just postponed, if the agreement is breached. Regardless, enforcement and verification mechanisms will be key. 

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Reports from private U.S. companies and industry would no doubt be needed to verify progress on complex structural issues to ensure change is actually happening on the ground. A joint U.S.-China committee to regularly review implementation could be helpful as well.

An effective agreement with China to ensure respect for fair trade and investment and international rules and agreements might better and sooner have been reached with the cooperation of like-minded allies, like the EU, Japan and Canada. This was foreclosed by the administration's unilateral tariffs on national security grounds against their products.

But it is good news that a U.S.-China agreement may soon be reached; a credible agreement that both see as a “win” would reduce both economic and geopolitical risk and uncertainty and give the global economy some breathing room. 

Stuart Eizenstat head's Covington & Burling LLP's international practice. He's the former U.S. ambassador to the EU and the former domestic policy advisor to President Jimmy Carter. He's the author of "President Carter: The White House Years."

Anne Pence is a senior international advisor at Covington and a former G8 policy and international economic adviser to the State Department and senior advisor to the U.S. Millennium Challenge Account.

Christopher Adams is a senior advisor at Covington and a former Treasury official and trade negotiator responsible for China.