With their trade war in unchartered waters, having expanded from tit-for-tat tariffs to a tug of war over “entity” blacklists and U.S. threats of banning American businesses from operating in China, U.S. and Chinese negotiators have agreed to a tentative, narrow — and fragile — reprieve. Two days of talks ended Oct. 11 with a meeting between U.S. President Donald Trump and Vice Premier Liu He, China’s chief negotiator, and the announcement that Beijing and Washington had reached a “phase one” agreement. As a result, the White House will delay its planned Oct. 15 tariff increase on $250 billion in Chinese goods. The deal remains to be written, according to news reports, leaving details about China’s commitment to buying $40 billion to $50 billion in American agricultural goods, enacting certain intellectual property protections and currency measures, and taking additional steps to open its financial sector to foreign investors to be worked out in the coming weeks. A presumed target date for a written agreement to be signed is in mid-November when Trump and Chinese President Xi Jinping plan to attend the Asia-Pacific Economic Cooperation summit in Chile.

The Difficult Issues

The easing of restrictions on Huawei — a core Chinese demand — was not part of this week’s deal, underscoring how difficult future negotiations will be. Additionally, the partial deal doesn’t cover most of the thorny structural issues between China and the United States, such as China’s industrial policies and government subsidies to its economy or an enforcement mechanism. Although Washington and Beijing are both politically motivated to reach a narrowly focused agreement, the path forward is littered with pitfalls and a high chance talks will again break down and lead to another uptick in tensions.

To reach its main objective to ease the U.S. tariff hit on its economy, Beijing worked to sweeten the chances of a deal by softening its hard-line position on resuming American agricultural purchases, including 4 million metric tons of soybeans, that it had embraced since April. Coinciding with the current round of talks, Beijing also announced an advanced timeline for ending foreign ownership caps in certain financial sectors.

Washington and Beijing are both politically motivated to reach a narrowly focused agreement, but the path forward is littered with pitfalls and a high chance talks will again break down.

Still, Beijing’s offers didn’t go much beyond the low-hanging fruit it had previously put on the table. According to reports, China refused to make new concessions on industrial policies and forced tech transfers — core structural demands by the United States. Even a possible currency pact, which is expected to be included in the partial deal when it is written, doesn’t necessarily constrain China’s monetary policy at a time when Beijing has a strong interest in limiting the yuan’s depreciation to discourage capital flight. But with extended agricultural purchases covering, at least in some ways, the White House’s grievance over the U.S. trade deficit with China and potentially helping bolster Trump’s support among farmers — a key constituency — a partial deal seems to be more acceptable to the Trump administration now that the president also faces increased domestic scrutiny, from a congressional impeachment inquiry to widespread criticism of his handling of the Kurdish issue in Syria.

The Uncertain Path Ahead

The path beyond this latest limited cease-fire — the fourth truce since the U.S.-China trade war began 18 months ago — is as tenuous as ever, if not more so. Each previous lull generated optimism that a broader deal was possible, only to break down and produce greater trade hostility. The White House still needs concrete structural concessions from China to justify the value of the trade war. Judging by the Trump administration’s continued search for maximum leverage against Beijing — now entering extreme territory that includes threats of banning U.S. business activity in China and removing Chinese companies from U.S. stock exchanges — an increase in hostilities between the United States and China is not only possible but also may be hard to avoid, indicating further frictions between the world’s two largest economies lie ahead.

Source: Stratfor | October 12, 2019