When representatives from the United States and China meet for talks in Geneva on Saturday, they will take the first step toward normalizing a key economic partnership that has spun out of control since the first Trump administration’s trade war measures in 2018.
Now, in a series of tit-for-tat escalations initiated by President Donald Trump, the world’s two biggest economies have imposed tariffs so high that trade between the two is dwindling.
Despite their tough talk, both sides worry about the economic damage those tariffs could impose. The U.S. needs Chinese goods and resources to keep its economy humming. China needs the U.S. as a customer for the same reason.
Why We Wrote This
To the extent that this trade dispute is a geopolitical rivalry, it’s unlikely the two sides can erase the tension. But they can at least manage it. The current talks are an important avenue.
Are talks a positive development?
Anytime two sides negotiate, it’s a forward step. But it’s important to temper expectations. Both countries have so many trade issues to iron out that a grand bargain looks out of reach, says Scott Kennedy, a senior adviser at the Center for Strategic and International Studies.
What’s at stake?
Widespread economic damage. If America’s current tariffs stay in place, China’s economic growth rate this year could drop by as much as a third, jeopardizing millions of Chinese jobs. Already, there’s evidence that U.S. tariffs of 145% on Chinese goods are taking a toll. Chinese factory activity fell to nearly a two-year low as factories have lost U.S. orders, production slows, and workers are put on leave. Its year-over-year export cargo volumes dropped 10% during the first 25 days of April.
For the U.S., the main impact so far has been from anxious investors who sent stock markets tumbling as the trade war escalated, jolting even the staid bond market. Since then, stocks have recovered somewhat as prospects for talks have brightened. But the impact on U.S. consumers will kick in as prices of imported Chinese goods surge and shortages of other Chinese goods emerge.
As a result, economists are expecting higher prices and lower growth, with the nation possibly slipping into a period of relative stagnation coupled with inflation, a situation known as stagflation. Odds of an outright recession, in which the economy actually contracts, are also growing.
The U.S. and Britain just reached a trade accord. Why can’t the U.S. and China do the same?
Britain is a longtime American ally, while China is an emerging geopolitical rival. Plus, the U.S.-British trade deal announced Thursday is narrow, reducing auto and steel tariffs but keeping a 10% tariff on most British goods in place. Washington and Beijing face a much broader set of trade disputes that will take longer to iron out.
What does the Trump administration want?
It’s hard to know, analysts say, because the White House itself is divided. Mr. Trump appears to believe that all trade deficits are bad. (Most economists and many within his administration disagree.) Another faction within the Trump administration wants to slow China’s growth to maintain U.S. geopolitical supremacy. Yet another hopes to make the best of a bad trade policy, and by way of justification, is also playing up the rivalry with China.
What does Beijing want?
First, “Beijing seeks clarity on Trump’s true intentions,” writes Wang Xiangwei, a China analyst and associate professor of journalism at Hong Kong Baptist University. Ultimately, China’s goal is to lower tariffs – a deal that Beijing can cast as Washington backing down first.
Politically, Beijing also hopes to use the unpopular U.S. tariffs to promote itself as the protector of global trade and the more reasonable superpower, part of a broader competition with the U.S. for global power and influence.
A Thursday commentary in the Communist Party mouthpiece People’s Daily stated that China has stood up to the United States’ “illegal” tariffs and “blackmail” not only to defend its own interests, but also to defend “international fairness and justice.”
Is there a solution?
To the extent that this trade dispute is a geopolitical rivalry, it’s unlikely the two sides can erase the tension. But they can at least manage it. In current talks, they could look for a face-saving deal that allows both sides to claim some victory.
“If they reach a deal – and that’s a HUGE ‘if’ – it most likely would be an agreement for China to take steps to reduce its trade surplus and the US to commit to a predictable level of tariffs and other restrictions for a certain period,” Mr. Kennedy of the Center for Strategic and International Studies writes in an email. “Such a deal would restore some stability to the commercial relationship, but would not resolve either side’s underlying concerns.”
Beijing’s position is that “In the end, a deal is better than no deal,” says Bert Hofman, professor at the East Asia Institute of the National University of Singapore and a former World Bank official in China.
Who has the upper hand?
In the short term, advantage China. A collapse in the (smaller) Chinese stock markets wouldn’t cause quite the global wave that a U.S. markets plunge would. Then there’s the political fallout. The Chinese leadership doesn’t have the same accountability to voters as U.S. leaders do. In 18 months, many of President Trump’s Republican allies in Congress will stand for reelection. If a standoff on China leads to higher prices and shortages of key goods for Americans, an angry public could throw out some Republicans, handing control of the House and even possibly the Senate to Democrats. That would complicate Mr. Trump’s efforts to carry out his broad agenda.
China has more to lose economically from a trade cutoff because it sells far more to the U.S. than the U.S. sells to it. So in the long term, America probably has the advantage.
Is there a long-term answer?
The U.S.-China codependency has turned malign, argued economist Stephen Roach in his 2014 book, “Unbalanced: The Codependency of America and China.” A decade later, analysts say both sides must carry out difficult domestic reforms to rebalance their relationship. For the U.S., it’s federal spending. If President Trump could focus on narrowing the deficit – continuing to cut spending but also giving up on his goal of more tax cuts – chances are the U.S. would narrow its trade deficit over time as well.
For its part, China needs to rethink its position in the world, says Gerard DiPippo, senior researcher at the Rand China Research Center. It has outgrown its role as the world’s manufacturer, and the U.S. is joined by other nations that are now wary of opening their markets to a flood of inexpensive Chinese products. So China faces an uphill battle in redirecting lost U.S. sales.
Instead, China needs to shift some focus and spending to services like those of other advanced economies. It’s an opportune time to do so. The pandemic, a property market collapse, and now the trade war have sapped China’s consumer confidence. The challenge is that China’s leadership has elevated national security to an equal footing with growth in terms of importance, says Mr. DiPippo. That means self-reliance, the avoidance of foreign technology imports, and so on, may prove more compelling than strong economic growth.
“From China’s perspective, the U.S. is basically attacking them,” Mr. DiPippo adds.
That perspective will further complicate talks.
