Valdai Club

After rounds of hard and fluctuating negotiation, China and the US declared on October 12th that the two countries have achieved an “essential breakthrough” in the talk and could reach a limited agreement which deals with intellectual property rights, currency, agricultural produce purchases and tariffs. If the follow-up discussion regarding the details of the deal goes smoothly, Chinese President Xi Jinping and US President Donald Trump. 

This is, of course, good news, which serves as a cardiotonic to rapidly deteriorating China-US relations. The global stock markets gave very positive feedback after the two sides declared their progress. US Vice President Mike Pence also softened his tone in his latest China policy speech on October 24th. China-US relations have been on a free fall trajectory throughout 2019. Any effort to slow or even stop the downward spiral is, of course, much-needed. 

Having said that, our expectations regarding the agreement have to be realistic. It might be able to slow down the speed of deterioration to some extent, but be too late and too little to reverse any big trend.

From the very beginning, China-US trade talks have served not only an economic purpose, but a strategic one. The negotiations were actually a probe that China and the US are using to determine if they can narrow the real and perceived gap regarding their respective economic and even political models. That is probably the reason why the negotiations were so ambitious and comprehensive in the beginning. Before May 2019, the goal of the two countries in the talks was actually to strike a “grand bargain”. The negotiations addressed IPR protection, market access, the trade balance and the so called “structural issues” of Chinese economy. The “structural issue” is actually the Chinese economic model, or the Socialist Market Economy, which includes issues such as industrial planning, bank loans, state-owned enterprises, the currency rate, export subsidies, etc. If China and the US could reach a “grand bargain”, it means the two countries’ different perspectives regarding China’s economic model (and the political model behind it) are reconcilable. A “grand bargain” implies that it’s possible China and the US can avoid long-term strategic competition. 

Regardless of which side should be blamed, the negotiations collapsed in May. The two countries, perhaps, lost their last good chance to achieve strategic reconciliation. During the process of negotiation, the Trump administration launched a “technological cold war” against China. The episode involving Huawei, the leading hi-tech company in China, make many average Chinese believe that the sole goal of Trump administration in the trade war is simply to keep China down and stop China’s economic development. The protests and violence in Hong Kong since June 2019 further alienated Chinese people from the West. These developments have dwarfed all the strategic effects of any trade deal that the two countries might strike. 

According to the information released by the two sides after Oct. 12, the Trump administration has promised not to add new tariffs on Chinese goods; he has not add any so far. That means the US will undo nothing it did since the trade war began. Moreover, the Trump administration’s erratic style in negotiation has cast a doubt on the prospect of any trade deal. Will the Trump administration change its position in the future? Is this just a tactical need for next year’s general elections? There are plenty of voices in China expressing suspicion. On the other hand, some US experts also complain that China agreed to purchase agricultural products “that it will purchase anyway”. All in all, China does need those American agricultural products. 

So this “phase I” trade deal is more like kicking the can down the road. It is not good and strong enough, since it will solve few problems. But amid this hard time for the China-US relationship, kicking the can down the road is still much better than keeping it out there. It is at least a step forward. We can cross our fingers for a future “phase II” and even “phase III”.