A US-China trade deal will come. It just won’t solve any of the problems that matter
- An agreement is needed to mitigate current tensions, but the terms will neither tackle the imbalances in bilateral trade, nor address the geopolitical and strategic concerns that underlie the conflict
China and the US are likely to reach an agreement to end their trade war soon. Both sides will characterise the deal as a suitable compromise to mitigate the current trade friction between the countries.
However, the deal will not be transformative and instead will resemble a Band-Aid attempting to cover a gaping wound. There are many reasons the deal will fail to resolve the trade tensions.
First, the trade deficit between China and the US is structural in nature. China’s labour cost advantage, its central role as the global production network, and the role of the US dollar as the most reliable international currency, have facilitated the financing of American consumption of imported goods from China and elsewhere. America is addicted to cheap imported goods, and most of them come from China.
If successful, China could arguably displace the US’ dominant position in the technological and digital economies of the future. Further American anxiety stems from the closed nature of the “China net” and what that means for global production chains, transaction costs, supply chains and, ultimately, the integrated nature of the global economy.
This potential bifurcation of the global production network flies in the face of the US long-standing engagement strategy with Asia. In his book More Than Providence, Michael J. Green stated: “For over two centuries, the national interest of the United States has been identified by key leaders as ensuring that the Pacific Ocean remains a conduit for American ideas and goods to flow westward, and not for threats to flow eastward toward the homeland.”
This is the crux for Beijing, demands that exceed the expected superficial trade agreement will be rejected or delayed as they are an assault on China’s broader development strategies to deal with domestic challenges within the economy but also regional security concerns.
The deal is also problematic from a more global standpoint as it is likely to violate World Trade Organisation rules as it will be a small, sectoral-based agreement with discriminatory concessions traded among the participants. The signal these bilateral negotiations send to other important trading partners is one of contempt and self-preservation. The WTO may be on life support, but for as long as it is alive, the core principles of non-discrimination, transparency and equality of opportunity should be respected.
We are likely to soon see pictures of negotiators smiling and shaking hands after successfully concluding a deal. But these smiles will fade over time when both sides realise that, while the deal may provide a reprieve from the trade war, it will not transform US-China trade relations or end the friction.
Stephen R. Nagy is a distinguished fellow of the Asia Pacific Foundation and a senior associate professor at the International Christian University in Tokyo. Bryan Mercurio is an Outstanding Fellow and professor of law at Chinese University of Hong Kong