The China-US trade deal will be signed on time; the path is set

The two presidential couples of China and US siding the G20 host, Argentinian president Mauricio and Madame Macri (first row in the middle). Family photo from the G20 Summit in Buenos Aires, 30/11 and 1/12/2018. G20 photo, some rights reserved.

The China-US trade truce agreed upon by the US President Donald Trump and his Chinese counterpart Xi Jinping has just prolonged the uncertainties haunting all and every world market. Stock exchanges on Monday went up and then on Tuesday fell on the news. The respite was struck last Saturday between the two leaders, in the sidelines of the Buenos Aires G20 Summit.

But what was truly in the much boasted by Trump ‘trade attack’ on China? As for the reaction of markets, everybody knows they operate with a very short time horizon. On the contrary, Chinese planning spans for decades. But let’s start from the latest developments.

An immediate result of the deal will be that the White House postpones the increase of import tariffs from 10% to 25% on Chinese cars and other goods for 90 days – counting from 1st January. This increase is worth in total $200 billion. The super levy was scheduled to take effect at the beginning of next year. In case an overall agreement is not concluded, the increase will take effect.

Last October, Trump had also threatened to impose additional import tariffs on another package of Chinese goods of a value of $267bn. Now, seemingly, he has forgotten it. The US has already imposed extra tariffs of $50bn worth of Chinese products. In 2017, the US bought goods from China worth $505bn in total. In reality, then, Trump has actually punished just the one tenth of the Chinese exports to America, despite his deafening rhetoric about it.

Much rhetoric little action

In return, China, offered to start reducing non tariff barriers and also cut some import tariffs, possibly but not at all surely, to naught, from 40% today. This discussion regards the import levies on cars assembled in the US plus some other American products. However, only the electric car maker Tesla and the German luxury automobiles producer BMW ship some noticeable numbers of automobiles from the US to China.

Xi seems also to have reassured Trump that China will substantially increase her imports from America. However, he gave no written commitments regarding the imports in key sectors like agriculture, energy and industrial goods. Then, so far, a first assessment of the immediate effects of the Trump – Xi trade deal don’t favor the ‘America first’ president.

What does the US really want?

Concerning the deep structural changes in the Chinese economy, as requested last summer by the White House, they don’t seem to have left important traces on the debate of planned accord. Some months ago, Larry Kudlow, the White House Economic Adviser, spelled out what the US demands of China, and it was a lot more.

He said the US is seeking all across the board “zero tariffs, zero non-tariff barriers, zero subsidies, stop the Intellectual Property theft, stop the forced technology transfer and allow Americans to own their own companies.” Economic analysts had termed this package of demands as tantamount to asking China to rebuild her vast economy.

Lots of noise little substance

Despite of all those farfetched American demands, the two leaders agreed in the abstract to start talks on structural changes. Reportedly, it will be about non-tariff barriers, technology transfers, intellectual property protection, cyber intrusions and cyber theft, services and agriculture. It seems, though, the US is just seeking much better market access to the Chinese economy and the possibility of American investors to have full control on their businesses there.

Still, Beijing has not confirmed it agreed to the latest list of American demands and all the mainstream global news groups name only White House sources on the issue. It appears, however, that the White House has already backed off from “all across the board zero tariffs, zero non-tariff barriers and zero subsidies”. Despite this, the American administration will be prone to inflate what Trump got from Xi.

The three zeros

The Kudlow absolute ‘three zeros’ for import tariffs, non-tariff barriers and subsidies, essentially constitute a completely new restructuring of the entire Chinese economy. No country in world history has ever totally abolished import tariffs, abandoned all no-tariff barriers or having completely zeroed subsidies to key sectors of the economy. Even in cases where all imports tariffs were fully forsaken, non-tariff barriers and subsidies were still in use.

Let’s turn to Europe for intentions and realities. The 28 European Union countries, in building their internal market and customs union during the 1990s, dumped all import tariffs, abolished non-tariff barriers and forsook national subsidies. Some 19 of them went further and introduced the single euro money in 2002 to facilitate trans border transactions. Still, the European Commission spends a lot of effort and increasing resources looking for and exposing breaches of the rules.

Look how the EU does it

In reality, the EU is still troubled by national state subsidies and non tariff import barriers, which on some occasions are considered legal by the Brussels authorities. In this respect, the European Commission Directorate General for Competition is a very costly watchdog, securing a level playing field for all member states. The relevant Commissioner in charge is always preoccupied with cases of ‘illegal’ non-tariff barriers and national subsidies. He is also charged with making sure that business ‘Mergers and Acquisitions’ do not breach fair competition rules. Understandably M&As may constitute a menace to fair competition in the EU internal market and may hide national subsidies.

In the eventuality, then, that the Americans really want China to abandon non-tariff barriers, zero her state subsidies and introduce fair completion rules, Washington needs a watchdog to permanently make sure those rules are followed. Such an instrument, though, must make sure the US is also abiding by the same regulations. Is Trump ready to accept that? Of course he is not. What then?

What does Trump really intend?

Obviously, Washington will be happy to see China resume her US agricultural products imports and the purchases of American oil. Farmers in the American Mid West have started complaining strongly for the reduction of sales of their produce to China. So, Trump, is already vulnerable enough to a relevant good offer from Beijing.

On top of that, a more or less substantial reduction of import tariffs and the abolishment by Beijing of some flagrant non-tariff barriers will help Trump sign a deal. Along the same lines regarding investments, a Chinese relaxing of foreign investment rules will certainly help. It’s about controlling 51% of the voting shares of business the Americans create in China. Given that, Trump will be happy to sign a mega China-US trade deal, as he will surely call it.

There is more uniting them

As for issues regarding technology transfers, intellectual property protection, cyber intrusions and cyber theft, Beijing will be more than willing to undersign any checks and controls the Americans wish. Why not? Again, who is to make sure that those checks and controls are not breached by both the two largest economies of the world? They both know it and it’s not sure if they really want to fight it.

The fact that, with the American blessing, Taiwan is ready to accept a kind of Beijing authority tells a lot. The relations between China and US are much deeper than what is left to be understood and seen. In reality, none of them wants to seriously threaten their joint supremacy in the world.

So, no doubt, the deal will be signed within 90 days counting as from January 1st 2019. Xi won’t mind if Trump will be boasting in Washington he ‘taught Beijing a lesson’. The Chinese think and operate with a much-much longer time horizon than any American does.

 

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