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|By Michael Zakkour · 2019-07-09 · Source: NO.28 JULY 11, 2019|
Workers arrange fireworks imported from central China's Hunan Province on a dock in Philadelphia, Pennsylvania, on May 25 in preparation for a fireworks display on Memorial Day, observed on May 27 this year (XINHUA)
Trade relations between China and the United States have been in a downward spiral since talks fell apart in the middle of April. At that time, it seemed as if the two economic superpowers had developed a framework for an agreement on trade, tariffs and technology that would lay the foundation for constructive bilateral relationship building for years to come. Then, as optimistic as the situation seemed to be, it suddenly reversed. Not only was there no deal, but the situation quickly escalated for the worse.
The U.S. imposed new tariffs, China retaliated with new tariffs of its own, and the U.S. proposed banning telecommunications giant Huawei from selling its equipment and 5G systems in the U.S. and U.S. technology companies from selling components to the company.
Over the last three months, the result has been a marked deterioration where the two sides have progressed from a serious trade dispute to a trade war and what could signal an all-out technology war.
Making matters even more complicated and unclear, the U.S. threatened to slap tariffs on U.S. imports from Mexico, ongoing trade issues continue between the U.S. and the European Union, and just days before the Group of 20 (G20) Summit, the U.S. singled out Viet Nam as its potential new trade war target for new tariffs.
A mix of sun and clouds
Heading into the summit held in Osaka, Japan, on June 28-29, the spotlight, much as it was at the G20 Summit 2018, was on presidents Xi Jinping and Donald Trump.
This year, there was an increasing level of uncertainty globally on where things stood between China and the U.S. and what the future may hold for global businesses, trade, industry, geopolitics and finance. The question on everyone's mind was: Will the negativity continue to escalate or is there a light at the end of the tunnel that will see both sides find common ground for an agreement that will put the world and its economy on more certain footing?
The weeks leading up to the expected Xi and Trump talks were filled with many questions and few answers about whether the results of the meeting would be positive, negative or largely neutral.
We now have our answer, and it is largely of the good news/bad news variety. The good news is that tensions have seemingly cooled and threats of escalation have been put to rest for now. The two countries have agreed not to take any dramatic new actions regarding tariffs, the U.S. has walked back its threat of a total ban on Huawei, and China has made some commitments to buy U.S. agricultural products.
Most promising is the announcement that trade talks will resume and that steps will be taken to resolve the major issues at stake, stabilize relations and ensure that the rest of the G20 members (as well as the rest of the world) know what the rules of the game are going forward.
With so much at stake and the entire world watching for the slightest hints of progress or regression, the slightest perception of an escalation in the trade war could have had severe consequences for the short-term health of the global economy.
Markets in the ensuing week were generally higher, responding positively to the summit, as many observers sighed in relief that the G20 economies had dodged another bullet. But lack of regression is not progress and there remains the hard work of sorting out a meaningful, long-term and enforceable agreement. The skies are starting to darken on trade, and the lack of a substantial agreement in 2019 has many economists concerned that 2020 will be a year of global recession.
In April, the International Monetary Fund cut its forecast for global growth for the year to 3.3 percent, warning that any significant increase in trade tensions could "wreak havoc on supply chains and disrupt industries."
The JPMorgan Global Manufacturing PMI dropped to its lowest level since 2012 in May. And many U.S. retailers are being forced to raise prices due to tariffs, although U.S. consumers and major retailers such as Walmart, Costco and Target got a temporary reprieve.
A representative of the U.S. Toy Association says they object to U.S. tariffs on Chinese imports in an interview on June 17 in Washington, D.C. (XINHUA)
This is where things stand now:
The U.S. and China have agreed to resume the negotiations which ended abruptly in April; the U.S. has suspended plans to impose new tariffs on $300 billion of Chinese imports while new negotiations are ongoing; the tariffs currently in place on both sides will remain in place; the U.S. has backed off its position on a total ban of Huawei; China committed to buying more U.S. agricultural and industrial goods; Trump spoke highly of Xi and stated he is committed to working toward a resolution of the trade war.
In essence, the two sides agreed to start talking again but no real breakthrough was made, and full resolution still seems a way off.
In a sign of progress, Chinese Premier Li Keqiang at the World Economic Forum meeting in Dalian, China, on July 2 made some surprisingly open and public remarks where he pledged that China would cut some tariffs; strengthen efforts to protect intellectual property; open the Chinese market to foreign financial institutions more broadly; and allow foreign companies to apply for research and development subsidies.
The best chance for the new round of talks to produce meaningful and lasting results will come from two things. The first is talking—not the normal schedule of trade talks with significant lag times, but a non-stop conversation starting now.
The two sides have a significant amount of ground that needs to be closed. This will require a non-stop dialogue and an all-hands-on-deck effort from Washington and Beijing, but also in Shanghai, New York and elsewhere, if necessary.
The second is work on a deal that recognizes that not every issue and contentious disagreement between the two sides can be solved now.
It is expected an agreement can be reached that focuses on trade in the short term (where concessions can be made by both sides) and recognizes there are still bigger picture items of global importance to solve once a stable trade environment is established and uncertainty gives way to a new normal that all interested parties in businesses and governments around the world can adjust to.
The road may be long, but time is short, and neither side really has as much time on its side as it thinks.
The author is vice president of China/Asia Pacific strategy and global digital practices at consulting firm Tompkins International
Copyedited by Rebeca Toledo
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