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Will Trump and Xi reach a trade war peace deal?

Immediate issues can be settled but little chance of reducing long-term rivalry

| China
Easing the trade war will be easier than addressing the long-term strategic tension, which will continue.   © Reuters

Trade tensions between the United States and China continue to rattle world markets. And many fear the onset of a Cold War between the two countries, especially in the aftermath of U.S. Vice President Mike Pence's by now infamous "Iron Curtain" speech excoriating China.

U.S. President Donald Trump and Chinese President Xi Jinping reached a temporary truce on economic issues on Dec. 1 following the Group of 20 summit in Buenos Aires. But questions remain on what exactly was agreed to by the two sides, as well as prospects for resolving the long list of American complaints about Chinese policies and practices.

According to the White House statement, the U.S. agreed that on Jan. 1, 2019, it will leave the tariffs on $200 billion worth of products at 10% and not raise them to 25% for now. China agreed to purchase "a not yet agreed upon, but very substantial, amount" of agricultural, energy, industrial and other products "to reduce the trade imbalance" between the two countries, and China agreed to "start purchasing agricultural products [from the U.S.] immediately." The timing, volume and value of these Chinese commitments remain unclear, and comments by senior U.S. officials following the dinner were inconsistent.

In addition, the two sides agreed "to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture." The two sides agreed that they will "endeavor to have this transaction completed within the next 90 days," and if unable to do so, "the 10% tariffs will be raised to 25%."

Based on the experience of U.S.-China relations over the past two years, it would be reasonable to predict the following: First, the 90-day period will result in Chinese commitments to purchase American products that will bring an easing of tensions and a partial lifting of tariffs; next, the structural issues will not be resolved during the 90-day period and will require additional time to address; and lastly, the U.S. positioning of China as America's rival and competitor will continue as long as, in Pence's words, "Beijing is employing a whole-of-government approach to advance its influence and benefit its interests."

First, the trade issues are the easiest to address in that progress can be shown by China buying more from the U.S. This can be achieved by reducing tariffs, eliminating import quotas, or outright purchases of American products and services -- easier for China to do than for most other countries, given the central role the government plays in the economy. These purchases will also have the effect of reducing pressure against Beijing from those American producers and their elected political representatives, who will benefit from increased sales to China.

There will be an incentive for the U.S. to lift tariffs on Chinese products in response to these purchases by China, since over time the negative effects on American producers and consumers from such tariffs will grow. And a continuing tariff war will no doubt have a negative impact on the American stock market, which is already showing signs of a major correction and perhaps even a significant tumble as signs of a potential recession loom for 2019 or 2020.

In addition, the transactional nature of trade and trade agreements are short-term and easier for Trump to understand, manipulate and use to his advantage in his attempt to gain support from his domestic constituents. Witness the gap between the rhetoric of "success" and the very limited substance of what was actually achieved in renegotiating the U.S.-Korea Free Trade Agreement and the North American Free Trade Agreement.

Second, compared with trade, structural issues are more difficult to resolve precisely because they are structural -- i.e., embedded in the Chinese social and economic system. Trade is quantifiable -- e.g., how much tariff levels are reduced, how many cars are sold, how much the trade imbalance has been reduced. Structural issues are more difficult to identify, quantify and remedy, especially since many of them are not fully under the control of the central government. In addition, policies such as China 2025 -- the latest drive to modernize the economy -- are considered essential to the nation's economy, technology and global competitiveness. Expecting Chinese leaders to abandon it would be nothing short of naive.

Therefore, the likelihood of fully resolving these issues in the 90-day period is low. However, with the pressure of the midterm elections behind him and with a Democratic majority in the House of Representatives that will keep him on the defensive with subpoenas, hearings and investigations, Trump is unlikely to put structural economic issues with China as a top priority on which to continue a trade war. Instead, U.S. Trade Representative Robert Lighthizer will likely be tasked with continuing negotiations beyond the 90-day period to achieve some semblance of progress.

Third, a partial resolution of the trade issues and a continuing negotiation on the structural issues will do little to avert the tensions that are certain to continue as China challenges the U.S. economically, politically and militarily. The only question is whether a future U.S. administration will choose to pursue a more strategic, nuanced and long-term policy toward China that will effectively engage America's allies and partners, rather than the America First, tariff-centered, transactional approach being pursued by the Trump administration. As Secretary of Defense Jim Mattis wrote in his Dec. 20 letter of resignation: "We must do everything possible to advance an international order that is most conducive to our security, prosperity, and values, and we are strengthened in this effort by the solidarity of our alliances."

Glen S. Fukushima is a senior fellow at the Center for American Progress in Washington, D.C., and served as deputy assistant United States Trade Representative for Japan and China and as president of the American Chamber of Commerce in Japan.

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