US-China trade deal is a temporary truce in an ongoing war

Donald Trump is by no means the first US President to make sudden, dramatic changes to US foreign policies. In 1972, President Nixon’s visit to the People’s Republic of China, ending twenty-five years of no communication between the Washington and Beijing, was one such change that stunned contemporary observers.

Where the current occupant of the White House is unique, however, is in the sheer erratic character of his turnarounds. Perhaps no other President has exhibited such an affinity for the abrupt and jarring diplomatic volte face. This behaviour has been on display in President Trump’s apparent change of tune on the trade war between the US and China in recent months.

For almost two years, between January 2018 and October 2019, Washington and Beijing have engaged in a vicious cycle of tariffs and counter-tariffs, targeting billions of dollars’ worth of each other’s trade goods. This game of tit for tat tariff tennis was pursued by both sides regardless the fact that the two countries are one another’s most important trading partner in a complex and integrated global market.

Yesterday, however, the White House was filled with applause as President Trump and Chinese Vice Premier Liu He signed off on a new “phase one” trade deal. It will see China boost its purchases of US goods and services by a total of $200 billion over a two year period in exchange for the US removing duties on certain Chinese manufactured products.

The announcement is welcome, and will at least soften a conflict that has hurt both countries. The Federal Reserve has estimated that China’s economy has taken a hit of 0.25% to real GDP as a result of the trade war. Meanwhile, the Congressional Budget Office (CBO) estimates that the uncertainty of the showdown between Beijing and Washington has taken 0.3% off the US’s economic growth and reduced household income by an average of $580 since the trade war began.

Yet while the trade deal opens up the possibility for further negotiations, it also keeps in place several protective tariffs that have been introduced since 2018. The new deal has halved tariff rates on $120 billion worth of goods, but 25% tariffs remain on $250 billion worth of Chinese industrial products used by US manufacturers. As do Beijing’s duties valued at $100 billion on US goods.

Several contentious issues are left unresolved altogether – China’s role in subsidising industries and the US’s outright ban on Huawei telecoms from gaining a foothold in US markets remain flash points of debate. On top of this, not much has been done to provide equal market access for US financial services industries working in China, despite noises being made about doing more to open up this area to competition from non-Chinese companies. Above all, the dispute resolution mechanism provided in the deal has been left conspicuously, and purposefully, ambiguous.

In other words, the agreement of the rather vague phase one deal has not rolled back the tide of tariffs introduced by either side; and neither government has yielded on crucial points of contention. This includes those responsible for the outbreak of the conflict in the first place. So long as the US-China geopolitical rivalry continues to simmer beneath the surface of Sino-American relations, policies are unlikely to change. Tariffs are here to stay.

As is always the case, the real losers of the turn towards protectionism are businesses that have to factor in higher production costs – and American citizens, who at some stage will have these costs passed onto them through higher prices. This fundamental lesson is not new – it was articulated clearly by the scholar Ibn Khaldun in fourteenth-century Cairo; and it was expressed powerfully in the commercial cosmopolitanism with which Adam Smith advocated free trade in eighteenth-century Glasgow.

The US President struck a triumphant tone yesterday as he sought to convert the phase one deal into political capital – but his exuberance masks a sober reality for America’s households that have borne the brunt of his heavy handed approach to China. In his remarks delivered at the White House after the fanfare of the official signing of the deal, Trump proudly declared that: “Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families”. Yet, as the National Bureau of Economic Research estimates suggest, a bill of more than $40 billion has been footed by US companies and consumers as a direct result of the President’s trade policies since January 2018.

As things stand, both Presidents Trump and Xi have their own reasons for cooling off the trade war and acquiescing in a truce. The signing of this deal has come in time for Trump’s bid for re-election in November this year. His trade policies have already cost his party in the 2018 congressional elections. He will be hoping to persuade the American public that his deal with China is a tangible foreign policy success, a vindication of the high-stakes, hard line approach he has taken to foreign trade.

For his own part, moving into 2020 President Xi will be keen to turn attention away from the protests that have been taking place in Hong Kong and Guangdong, as well as criticisms on the international stage concerning Beijing’s repression of Muslim minorities in Xinjiang. Signing the phase one deal now also allows Xi, as much as his American counterpart, to draw the gaze of observers towards a diplomatic success story.

This is the crux of the matter, and it indicates why the US-China trade deal is in reality more likely to be a temporary truce than a long-term rapprochement. It has not rolled back the tide of protectionism that is re-structuring the global economy; and it has more paused than reversed the movement of US-China relations towards systematic confrontation.

It is ultimately a deal based upon a specific confluence of domestic political conditions in China and the US – conditions which are liable to change. For this reason, it is unlikely to represent anything more than an interlude in the ongoing trade war.