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Opinion

Is the US-China trade war entering a dangerous endgame?

Despite friendly signals from both sides, a talks breakdown cannot be ruled out

Beijing will insist on reciprocal U.S. actions in any trade deal.   © Reuters

What is the likely outcome of the U.S.-China trade war in light of the U.S. decision to delay tariff increases that had been threatened for March 1 and the promise of a summit between U.S. President Donald Trump and Chinese President Xi Jinping?

Recent meetings in Washington and Beijing have seen both sides operating from a common playbook instead of resorting to their own talking points. That is real progress. Reports indicate that the most recent round of the bilateral trade talks reached a consensus on peripheral issues, such as currency stability, and made modest progress on language concerning intellectual property rights, forced technology transfers, services, and non-tariff barriers.

But there is no agreement on core structural barriers in industries which China believes require protection from foreign rivals because they are not yet ready for competition or because there are security issues involved, as in telecoms and banking.

Little meaningful progress has been done in China to recalibrate the role of state-owned enterprises either at home or abroad, other than to call for mixed ownership and improved management, which still leaves the state in control of key sectors. The goals of "Made in China 2025," the country's strategic program to achieve dominance in high-tech sectors, have not changed.

The decision by the U.S. to delay tariff increases on Chinese goods while leaving so many issues to be solved at the proposed Trump-Xi summit at Mar-a-Lago in late March raises the stakes -- and the risks of failure.

With luck, outstanding issues concerning enforcement mechanisms and agreed indicators to measure progress can be finessed over the next few weeks. The result would be an end-March truce.

But that could be temporary. The U.S. would almost certainly launch new trade actions if Beijing fails, as is likely, to deliver on its reform promises before the 2020 American presidential elections.

With meaningful enforcement measures most unlikely to materialize, a minimalist deal is becoming the base case; that is one consisting of China's purchase of big-ticket items from the U.S., a further opening of the Chinese market to American companies, and window-dressing measures on intellectual property rights and forced technology transfers.

A more substantial and durable deal -- one that reduces the risk of tariff increases over the next 18 months -- may be the least likely result.

There is another dimension of the talks that Americans underestimate. Simply put: What does China get out of any deal besides achieving a temporary reduction in the risk of increased tariffs? Beijing almost certainly will insist on reciprocal U.S. actions in any trade deal. Xi will need to be able to show his domestic audience that he has got something more out of a trade deal than postponing higher tariffs.

Beijing may press Trump to instruct the U.S. Department of Justice to reach a settlement with Chinese telecoms group Huawei for allegedly evading U.S. sanctions on Iran, while allowing Canada to release Meng Wanzhou, Huawei's chief financial officer and daughter of the group's founder, after she was arrested in December at the request of the U.S.

Xi would also likely want to see a rollback of existing U.S. tariffs on specific product categories. If immediate tariff relief is not on offer, the Chinese president will have a hard time accepting any U.S. deal.

Disagreements over trade strategy among Trump administration officials will continue into the end-game phase. This could add to mistrust, but also encourage a possibly mistaken Chinese confidence that Trump will relent on enforcement in deference to Xi.

That could happen if Trump believes that Chinese support is needed to support a North Korean nuclear deal following his summit with North Korean leader Kim Jong Un in Hanoi. Trump might also decide to conclude a face-saving deal with Beijing on trade if the Hanoi summit yields little but criticism about his inability to get concessions from Pyongyang.

What will U.S. companies say about a "lite" trade deal outcome? American corporate reaction is likely to range from a tepid "wait-and-see" attitude to criticism that the fallout from trade disruption and China's subsequent treatment of U.S. companies is not worth the price of getting some big-ticket purchases and promises of market opening. After all, most features of such a deal have been on the table since November 2017.

But a modest deal is not the only possible outcome. The chances of a no-deal outcome from a Trump-Xi summit are at least 20%. Keep in mind that one baseline assumption that Trump shares with both trade hawks and doves in his administration is that China is facing the real risk of a sharp decline in growth by the middle of this year.

That perspective would support a "now or never" view that the U.S. should use its leverage to adopt a tough approach in the weeks ahead. That means that a spectacular breakdown in the Florida sunshine cannot be ruled out.

Kevin Nealer is a principal of The Scowcroft Group, a former U.S. government trade lawyer and non-resident senior fellow at the Center for Strategic and International Studies in Washington D.C.

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