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PR masters will end the war, but problems will remain

7 Mar 2019 14:54|Marcin Lipka

"Probably in March we will witness the end of the trade war between the US and China being in the spotlight. Both sides will exchange frilly documents and spectacular promises. However, the problems will not be solved," writes Marcin Lipka, Conotoxia Senior Analyst.

Although the trade war between the powers has been discussed for over a year, the first real effects did not materialise until July 2018. Then, the US customs duties on Chinese imports were actually introduced, which were extended in the following months, so that at the end of September last year almost half of the imports from the Middle Kingdom were subject to customs duties.

At the beginning of December 2018, Presidents Donald Trump and Xi Jinping announced, after the meeting in Argentina, the opening of negotiations on the causes of the current dispute - trade deficit, structural changes in the context of forced technology transfer or protection of intellectual property.

After this meeting and the leaders' pledge, customs duties have not increased any more. And indeed, broad bilateral talks have begun. There are many indications that an agreement will be reached by the end of March (according to "The Wall Street Journal").

Fake deal

In theory, we should be pleased that we are moving surprisingly quickly and efficiently towards trade peace. Unfortunately, given the press reports and the willingness of the US administration to quickly declare success (in a year and a half there will be more elections in the USA), the core of the problems, which are becoming an increasingly serious challenge for the United States, China and other developed economies, is clearly missing.

There are, among other things, completely unrealistic promises. Steven Mnuchin, Treasury Secretary in Trump's cabinet, said in the CNBC that Beijing had offered to buy US goods for an additional 1.2 trillion USD, which would gradually reduce the US trade deficit in trade with China in order to reach a balance in 2024.

The 1.2 trillion USD is merely taken to satisfy the objectives of the current administration. The Council on Foreign Relations ("Taking Managed Trade Seriously") analysis shows this. US exports (goods and services) would have to triple over six years to reduce the deficit to zero. Interestingly, in 2018, the deficit went in the opposite direction and expanded to 419 billion USD, the highest level in history.

In turn, President Trump warms up his attitude towards China, constantly repeating that the leader of the Middle Kingdom is his friend and that the Chinese have resigned from the use of the statement "Made in China 2025" (strategy to become a technological leader in the world) because it bothered Americans.

However, there are many signs that the events of recent months are merely diplomatic hype and ignore the essence of the conflict. What should be done to improve the situation and build a global relationship based on healthy competition?

Spotting the real problems

The US trade deficit, which is really huge (commodity amounts to 891 billion USD annually - almost 5% of GDP), is mainly due to an excessive gap in the public finance sector (over 5% of GDP) and a small rate of household savings. Americans simply consume too much and no agreement with China will change it.

Another matter that needs solving is a change of approach to foreign policy. In recent quarters, the US has had smaller or larger debates with virtually all major countries. These included foreign trade (e.g. with Mexico, Canada, the European Union, Japan, South Korea) as well as security issues.

To force China to respect intellectual property rights (the US loses about 250 billion USD annually), open up its market more widely, give up forced technology transfer or finance its economy in a smaller and more transparent way through subsidies from the public sector, a coherent approach to these issues is needed from the US and its allies.

This process is perfectly described in the publication prepared at the end of February this year - “The US-China economic relationship”. It was signed by both the main think-tank on the left side of the political scene (Brookings Institution) and on the right (American Enterprise Institute).

Success is just a joint action

One of the serious mistakes of the United States was the withdrawal from the TPP (Transparency Partnership) free trade area. The engagement in the TPP of countries from several continents, e.g. Australia, Canada, Chile, Singapore, Japan, New Zealand, was supposed to force China to function as a developed rather than an emerging country.

Ultimately, China was also supposed to join the TPP, as it would not be profitable for Beijing to remain outside the trading block (annual losses would amount to about 40 billion USD). Joining it would have meant that the rules on intellectual property or technology transfer in developed countries would have to be adapted more closely, as the TPP also covered these key aspects of the current conflict.

In the longer term, Beijing would also benefit from the market economy. It would have reason to carry out extensive reforms in many inefficiently managed public sector companies whose debt exceeds the total liabilities of the Treasury and households.

However, Washington has chosen another path that reduces real pressure on China to achieve short-term PR benefits. In a few weeks, we will have a foggy agreement that in no way solves the conflicting issues, but only masks the real problems.

7 Mar 2019 14:54|Marcin Lipka

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