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A breathing space for Xi and Trump

Resolution of 1980s US-Japan trade conflict offers hopeful precedents

| China
Silicon Valley financial backers' frequent trips to China have come to a stop, as flights to mainland China from nearby airports have been suspended until the end of March.     © Reuters

U.S. President Donald Trump and Chinese President Xi Jinping have thankfully stepped back from the brink of a new Cold War -- but only for now.

The deal reached over the weekend at the Group of 20 summit in Buenos Aires is hardly a historic turning point. It is instead the vaguest sort of truce, with the U.S. and China each putting out conflicting statements on what has been agreed. The gap in the language highlights the chasm of economic differences that still divides Washington and Beijing -- and bodes ill for the coming talks.

In the White House version, the U.S. agreed not to raise from tariffs on $200 billion in Chinese imports from 10% to 25%, as it had threatened for Jan. 1. In exchange, China agreed to make "very substantial" purchases of U.S. farm, energy and industrial products and the two sides set an ambitious 90-day clock for negotiations on the core issues of forced technology transfer, intellectual property protection and non-tariff barriers.

In Beijing's version, China agreed only to import more U.S. goods and to negotiate, with no deadline, to "reach a consensus on trade issues."

Still, the cease-fire -- with or without the deadline -- gives the world's two countries a fresh chance to find an effective way to engage on trade. Talks are tentatively set to begin in Washington in mid-December, but the odds against success are long. There are two big obstacles -- trust and timing.

On the U.S. side, while the apparent bond between Trump and Xi is helpful, there is deep distrust over China's willingness to carry through on any commitments it makes. Just days before the summit, the U.S. Trade Representative published a lengthy update claiming that while China had announced some promising easing of foreign investment restrictions this year, it had done nothing to curb its campaign to acquire western technologies through cybertheft or forced transfers.

On the Chinese side, trust is similarly low. There is little willingness even to accept the legitimacy of Washington's complaints, and great uncertainty over which, if any, of the president's negotiators has the authority to make compromises.

Can such distrust be overcome? Probably not, but there may be useful models from the past. Over the two decades of U.S.-Japan trade negotiations from the mid-1970s until the mid-1990s, for example, U.S. frustration over what were seen as unmet Japanese promises eventually led to an insistence on "measurable results" -- the trade equivalent of Ronald Reagan's famous dictum "trust, but verify."

With Japan, negotiations began with broad frameworks aimed at addressing regulatory and non-tariff barriers to U.S. market access, under hopeful names like the Structural Impediments Initiative (SII) and the Market-Oriented Sector Specific (MOSS) talks. By the end, the United States was calling instead for market-share targets.

With China, the U.S. has gone through similar rounds of disappointment, both in using the World Trade Organization disputes process and bilateral frameworks like the Strategic and Economic Dialogue (S&ED) and the Joint Commission on Commerce and Trade (JCCT). If new deals are possible now, they will likely be incremental agreements with specified markers for success, and the threat of new sanctions for failure.

While the U.S.-Japan talks never produced spectacular breakthroughs, they at least kept up a steady drumbeat of pressure. In some sectors like semiconductors the U.S. gained new market access in Japan, while in others like cars Japan shifted some production the U.S.

More importantly, the U.S. in the 1980s began to address its internal competitive challenges. U.S. companies learned from their Japanese competitors, and the government worked closely with industry to push an innovation agenda.

The same will be required with China, though with some additional challenges. The Trump administration, to its credit, is tightening investment restrictions and export controls to restrict predatory Chinese efforts to capture U.S. technologies. But there is no evidence that the administration has a plan for tackling the bigger problems at home like education, workforce training and a broken social safety net that are weakening the U.S. ability to compete with a rising China.

Timing is the other big hurdle. Normally in negotiations, the side that wants the deal more quickly loses. China would seem in the stronger position because it prefers to drag out any talks, hoping for a waning of Trump's resolve and perhaps his electoral defeat in two years. Beijing can therefore be expected to drag its feet on every step.

The Trump administration wants a quicker deal that gives the president bragging rights. That raises two opposite risks: first that the administration accepts a weak agreement that does little to change predatory Chinese practices, or that the administration breaks off talks and imposes more tariffs, which is likely to roil markets even more the next time around.

Patience would better serve the administration. The challenge now is to produce a series of modest deals, in which China makes a set of verifiable and measurable commitments, accompanied by some partial easing of U.S. sanctions. Then the two sides should agree to further negotiations under new deadlines, while monitoring progress on the first set of commitments. And so on.

In the meantime, the United States needs to get serious about facing its domestic challenges. China has enough of its own internal problems that a proactive U.S. would have time on its side. Chinese debt has continued to soar, for example, as Beijing tries to prevent a trade war-induced economic slowdown.

The differences between the U.S. and China are not going to be resolved in three months, or even in three years. What is needed is an ongoing negotiating process, with deadlines and measurable targets for progress, that can gradually start to rebuild some trust in what will become an increasingly competitive relationship.

With the truce in Buenos Aires, there is now an opportunity to begin that effort.

Edward Alden is a senior fellow at the Council on Foreign Relations in Washington, D.C., and the author of "Failure to Adjust: How Americans Got Left Behind in the Global Economy."

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