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Keeping the peace in US-China talks
ONGOING US-China trade talks are a skirmish in what could become a protracted struggle. It may not a trade war but a wider contest - hopefully economic, not military - to realign global economic interests. One way to keep that contest peaceful is to recognise that it is a long-term project that could benefit both sides if they keep communication channels open.
It seems that negotiators will reach some sort of agreement on the discussion of punitive tariffs to defuse that issue in the short term. US commentators are making much of China's flagging economy. Chinese consumers are not buying as many cars or iPhones, imports are down, stock prices have plunged. China duly reported gross domestic product (GDP) growth of 6.4 per cent for the fourth quarter as the economy continued to slow. But US analysts say the real number is a fraction of that, maybe just one-third.
Leaks (perhaps trial balloons) are seeping out. At January's mid-level talks in Beijing, China reportedly committed to an additional US$1 trillion in imports from the US over the next six years. The US is considering lifting or at least reducing tariffs to incentivise Chinese negotiators.
China is not willing right now to give way on other points, such as technology transfer or government subsidies, because it does not need to. An economic slump may be pressuring Chinese leaders to end this skirmish, but US President Donald Trump is facing pressures of his own. He does not want to be on the wrong end of an economic cycle for the next US election in November 2020.
Tariffs were supposed to be a way to force not only China but also the European Union into acknowledging that some trade practices are unfair to the US, though Washington shares the blame for having ignored them for so long. To the US, China's mercantilist practices flout many of the free trade rules embedded in the World Trade Organisation (WTO). But free trade in a world of widespread subsidies for agriculture, technology and machinery is mostly a myth. The WTO, the last of the international organisations to be formed after World War II, should probably be the first to go.
The US-China rivalry is bigger than the WTO, which is a poor steward for the realities of globalisation. Mr Trump's aversion to multilateral agreements and organisations is not just a personality quirk, but a realpolitik that such wide-ranging accords cloak a multitude of sins. He prefers bilateral deals, and if getting to those requires some element of confrontation, so be it. Mr Trump has maintained from the beginning that he is a believer in free trade. Western media find that dubious coming from someone whose instinctual reaction is to slap tariffs on trading partners. The smallest infraction of what has become acceptable international behaviour prompts them to conflate the Trump administration with the protectionist regime of the 1930s Smoot-Hawley tariffs. It is not the only way that these media distort the picture of the current administration.
Proponents of free trade can brandish all the benefits to the US from globalisation as well as for the world economy in general, and they are not wrong. The challenge is one of balance. The devastation of cities in the US from unfavourable accords such as the North American Free Trade Agreement (Nafta) and China's gaming of the WTO system are what got Mr Trump elected. No one in these hollowed-out towns had to ask what he meant by "making America great again", or putting "America first".
But none of this rules out reaching an agreement with China or the EU or anyone else for a mutually beneficial exchange of goods and services. It does mean safeguarding US jobs by keeping the playing field as level as possible. Disagreement on just what that means is inevitable, and will periodically create new tensions.
The immediate issue of avoiding an escalation of this dispute is likely to be resolved because leaders in both the US and China are under pressure to do so. US stock and bond markets reacted positively to those leaks about concessions on both sides. There is considerable optimism after high-level talks last week in Beijing as negotiations now once again move to Washington this week.
Markets are myopic. Their long-term view extends to six to nine months, but they really cannot perform any other way. The rest of us, however, need to see current tensions and disputes in a longer-term context. China and the US must live with each other. Bilateral trade is crucial to both, but globalisation and its efficient supply chains undergirding world economic development are as well. OMFIF
- The writer is US editor at the Official Monetary and Financial Institutions Forum