Kevin Rudd is clear about what is required for the US and China to make a trade deal, but unless it is done this year he fears a trade collapse

Kevin Rudd is clear about what is required for the US and China to make a trade deal, but unless it is done this year he fears a trade collapse

Now that the celebrations marking the 70th anniversary of the founding of the People’s Republic of China are over, it is time to direct attention back to the Sino-American trade war. That conflict may well be about to enter its endgame. Indeed, the next round of negotiations could be the last real chance to find a way through the trade, technology, and wider economic imbroglio that has been engulfing both countries.

Failing that, the world should start preparing for its rockiest economic ride since the 2008 global financial crisis. There is a real risk that America will slide into recession, and that the global economy will experience a broader decoupling that will poison the well for Sino-American relations far into the future. There is also a widening window of opportunity for nationalist constituencies in both countries to argue that conflict is inevitable.

Thus far, the trade war has gone through four phases. Phase one began last March, when US President Donald Trump announced the first round of import tariffs on Chinese goods. Phase two arrived with the “Argentine reset” at the G20 summit in Buenos Aires last December, when Trump and Chinese President Xi Jinping announced that they would conclude an agreement within 90 days. That truce imploded in early May of this year, with each side accusing the other of demanding major last-minute changes to the draft agreement.

Phase three could best be described as the “summer of our discontent”: the United States imposed a fresh round of import tariffs, and China retaliated in kind, while also unveiling its answer to the US “entity list.” In response to the blacklisting of Huawei and five other Chinese tech companies, China’s poetically titled “unreliable entities list” threatens to target US firms for exclusion.

Given these developments, why should anyone expect the next round of talks to succeed?

For starters, the US and Chinese economies are both in trouble. In the US, recent poor manufacturing and private-sector employment figures have reinforced pessimism about the economy’s prospects. If conditions were to deteriorate further, Trump’s bid for re-election in November 2020 would be endangered. Likewise, Xi would be weakened by any significant slowdown on the eve of the Communist Party of China’s centenary celebrations in 2021, which will be a prelude to his bid for an already controversial third term starting in 2022.

Each side says publicly that the trade war is hurting the other side more. But, of course, it is hurting both, by destabilizing markets, destroying business confidence, and undermining growth. Each side also claims to have the economic resilience needed to ride out an extended conflict. On this question, it is unclear who has the stronger argument. America is certainly less trade-dependent than China; but China, though weakened by poor domestic policy choices enacted before the trade war, still has stronger fiscal, monetary, and credit tools at its disposal.

In any case, both sides recognize that they are each holding an economic gun to the other’s head. Hence, despite the political posturing, both Trump and Xi ultimately want a deal. Moreover, they need it to happen by the end of the year to prevent further damage from big tariff hikes currently scheduled to take effect on December 15. That timeline requires that both sides start taking symbolic and substantive steps immediately.

As a first step, China should propose an agreement using the same text as the previous 150-page draft, but with revisions to satisfy its three “red lines.” Specifically, China should remove the US provisions for retaining tariffs after the agreement is signed, and for unilaterally re-imposing tariffs if the US concludes that China is not honoring the agreement. And it should add a commitment that China will execute the agreement in a way that is “consistent with its constitutional, legislative, and regulatory processes.”

Second, China should improve its original offer of a $200 billion reduction in the bilateral trade deficit over time. This negotiating point is based on lousy economics, but it is important to Trump personally and politically.

Third, while China will want to avoid banning state subsidies for Chinese industry and enterprises, it must retain the draft agreement’s existing provisions on the protection of intellectual property and the prohibition of forced technology transfers. Moreover, it may be possible to have each country declare its position on state industrial policy in the official communiqué accompanying the signing of the agreement. Such a statement could even specify the domestic and international arbitration mechanisms that will be used to enforce all relevant laws on competitive neutrality.

Fourth, both sides must create a more positive political atmosphere. In recent weeks, there have been signs that this may happen, including reports of renewed Chinese purchases of American soybeans in September. Though purchases are still well below historical levels, this increase will help Trump to placate angry farmers in his base. The US, meanwhile, has already deferred a 5% tariff hike that was originally scheduled for October 1. It could also issue exemptions for some US firms to sell non-sensitive inputs to Huawei.

Fifth, both sides should regard the November 14-16 Asia-Pacific Economic Cooperation Summit in Santiago as the last chance for signing a deal. Following high-level negotiations between Chinese Vice Premier Liu He and US Trade Representative Robert Lighthizer this month, outstanding problems should be agreed in Beijing in early November. Getting the deal done before Thanksgiving will be critical to undergird US business and consumer confidence for the Christmas season.

I am one of the few commentators who have argued all year that, despite the political fireworks, Trump and Xi’s underlying interests make a deal more likely than not. But the recently announced impeachment proceedings against Trump could throw a wrench into this process. A weakened Trump may be emboldened to take a tougher line against China than US economic interests demand. On balance, however, Trump still cannot afford the risk of a 2020 recession, meaning that a deal remains more probable than not.

Nonetheless, a failure to manage the next two critical months could still cause the entire process to collapse. Both sides have already spent much time preparing a Plan B for 2020: to let loose the dogs of economic war, foment nationalist sentiment, and blame the other side for the ensuing damage. Should that happen, the risk of recession in the US, Europe, and Australia next year will be high, though China would seek to soften the domestic blow through further fiscal and monetary stimulus.

The choice now facing the US and China is stark. For the rest of the world, the stakes could not be higher.


Kevin Rudd, a former prime minister of Australia, is President of the Asia Society Policy Institute in New York. This commentary is based on a recent address to the US Chamber of Commerce in Beijing. Copyright: Project Syndicate, 2019, and published here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

40 Comments

Comment Filter

Highlight new comments in the last hr(s).

but China... still has stronger fiscal, monetary, and credit tools at its disposal.

I'm not sure about that, Kev! But you do have this spot on - "the world should start preparing for its rockiest economic ride since the 2008 global financial crisis. "

Spot on!

The trade imbalance is no quick fix, and it will take decades for the US to rebuild the industrial base they previously controlled. US's previous administration has been absent at the wheel, allowing their manufacturing to be exported to Asian to generate short term profits and bonuses for the company executives. One suspects the Clinton Foundation were blinded by the donations amongst other things.

Meanwhile the western banking system; controlled by the privately owned FED, has leveraged the workers left up to their eyeballs in debt they cant absorb any more. Now we have negative interest rates because the masses can no longer pay back the interest let alone the principal. The high cost of basic living and lack of competition may have something to do with this also.

People, the western game is up; created by the illusion debt has created and the unsustainable lifestyle it has been supporting. Interests in the US will want to keep it going, but they have run out of customers to do this. Back to bartering.

Silly conspiracy theory on who owns the US Fed is very shallow and needs to be called out. The Federal Reserve Banks are not a part of the US federal government, but they exist because of an act of Congress. Their purpose is to serve the public. 

While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends. Holding this stock does not carry with it the control and financial interest given to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans.

The US Executive branch appoints the Board of Governor members, confirmed by the Senate. It should be clear they are not 'controlled' by the member banks (a handcuff rather than any benefit) because the heads of each regional Fed bank, and the Washington DC based lead institution is almost always a respected economist and not anyone from the banking shareholding community, and usually an academic - except that is until the Trump Admin appointed Jay Powell who was such a banker. But this latest appointment was more because of the presumption that Powell would be an Adminstration lapdog. So far it hasn't worked out that way however.

The shareholding banks have often chaffed at the regulator actions of the Fed. The mistakes the Fed makes are those as a regulator, and not because of the unique 'ownership' model.

Please just don't make up smears. There are enough problems with lies and smears from the US President without needing anyone else to blindly follow him. Please stick to facts.

Great balanced piece, from a guy who obviously knows China well.
I agree with his view that there's more to lose than to gain, for both sides, with an ongoing trade war.
However he is right to point out that Trump might see greater political value in a 'strongman' approach to China, despite the economic pain.

Trump has built a brand that doesn’t serve reconciliation in this trade dispute. When I think of his decisions around Iran, his withdrawal from various international cooperation agreements, and his isolationist domestic policies, he has (in my mind) created an image of a dishonourable bully.

His nationalist rhetoric resonates with the US population and I wonder whether a recession, an inevitable event that he has ‘fought so hard to avoid’ would be enough to deter American voters in 2020 any more than ‘losing’ this trade war would. China knows what sort of customer he is and it’s the antithesis of socialist values.

I don’t think trump will compromise and I’d bet China is willing to wait see what an election brings.

VOfOCR
I agree with your assessment of Trump.
Latest tweet as reported by BBC. . . . "I just to reiterate, if Turkey does anything that I, in my great and unmatched wisdom, consider to be off limits, I will totally destroy and obliterate the Economy of Turkey (I’ve done before!)"
So yes; "his brand doesn't serve reconciliation" and "an image of a dishonourable bully" are very appropriate . . . along with arrogant.
Unfortunately the impeachment process is going to be all consuming and sadly his lies and cries of victim are going to overshadow the issues related to the trade war and the wider economy. While the 2020 elections was seen as a factor for Trump to settle early, this is now less likely to be so.
The outlook is for further economic headwinds for longer.

The West just has to keep borrowing to buy Chinese stuff.

10
up

The more I read of china's treatment of the Uigher and now starting on Hui, the less comfortable I am about any engagement or trade with China. They are conducting a Genocide every bit as bad as anything Stalin or Hitler did. Vast systematic murder enslavement and rape (and killing people for bodyparts FFS) for the crime of having the wrong parentage and not being Han, millions of people in concentration camps. It's the worst atrocity the world has seen for 40 years and nothing is being done.

China also is facing rapid growth of Christianity. After years living in a spiritual vacuum, China soon will have biggest population of Christians in the world, as well as Muslims. The education system set up by Jesuits and other missionaries is the best in China/Hong Kong, Notice Hong Kong protestors sang christian Hymns.

https://berkleycenter.georgetown.edu/responses/christianity-s-growth-in-...

Good idea, let's cut ourselves off from Russia, Saudi Arabia, Iran and the United States on that basis then too for consistency's sake. Reckon we could still function as a country?

Is it? How many have died or been dislocated in US-initiated foreign aggression?

I agree, which is why I wholeheartedly support Trump's trade war. China should be isolated like Iran and North Korea.

If you can't follow even the most basic principles of human decency, you don't get access to our markets.

The great delusion is that we need China. We don't need their plastic rubbish, we can buy it from elsewhere. THEY need our money.

they need our money? What, all that money we create as debt on housing, they may want something a bit more reliable than that.
China also makes super top quality, like my Oppo phone.

How do you suggest we should address the treatment of the Uighur people, Andrewj? Just out of interest.

Very valid perspective

If it were only about trade. This is about how the US can head off the challenge to it's global supremacy. The USA agreeing to terms that will allow the continuing rise of China seems a pipe dream to me.

Rudd knows China well, but it is also in his interest not to spell it out exactly as he sees it.

I agree, there won't be any meaningful trade deal between US and China. US is using trade us a tool to stop China from replacing it as the global financial leader.

And ultimately global financial leader = global top dog all round.
As others have alluded to, it's much more than just the economy (stupid)
It's a battle of values. West vs East, Democratic vs Authoritarian.
The east vs west contest gives it more bite than the cold war battle

Astute comment. Politicians like Rudd studiously avoid the fact that there isn't room for a hegemonic USA and a growing China - not good to frighten the horses.

So he - and derivatively we - blame Trump and blame 'trade wars' rather than discuss absolute limits.

There is no political or moral equivalence between Communist China and the US. Nor can the economic value of trade be separated from large-scale geo-political and national-internal consequences. There is no question that blind trade-seeking with China - as well as its straight-out theft of IP - has served to enrich a sworn enemy of the individual, social, cultural, religious and political freedoms we in the West take for granted. It is also far from clear that the access to its market and the goods received in return compensate for the social and productive losses already evident in the economies of so-called trading partners - including New Zealand.

Agree. We all know that the USA isn't perfect. But to use their imperfection in comparing them unfavourably to China is disingenuous.

I would say that when it comes to comparing moral high grounds, you should probably look at the big picture or you might as well not bother. Otherwise it's very much a convenient crisis of morals, and not an actual considered position. If you're going to to overlook the US's tendency to interfere in other countries, both militarily and economically, not to mention the odd CIA-funded regime change here and there, then you are setting a pretty low bar for other countries to get over.

The big picture and the small tell the same story. The moral and political chasm between Communist China and the US (and the rest of the free world) is absolutely clear. In one system, the people belong to (are the property of) the state. In the other, the state belongs to (is the property of) the people. People are fallible in both systems. But only one allows for internal reform. This is the essence of moral and political freedom. As those in Hong Kong realise, you lose this at your peril.

It's not the 'free world'. That's self-justifying propaganda - get over it.

We repress others, and access their resources against their will (sometimes even being accused of outright theft). We live, in other words, by not allowing others to be free.

Never lose sight of that, every time you buy an item of clothing or white-ware, remember it.

Powerdownkiwi, what on earth do you think is going on in Hong Kong? In Xingjiang? In Tibet? Sure the world is full of oppression, misery, dishonesty, failure to live up to admirable ideal. But we are fortunate - along with other parts of the free world - to have the moral freedom (your free thought) and political freedom (the democratic expression of social principles) to do something about it. Or, because things aren't perfect, would you just roll over?

f you're going to to overlook the US's tendency to interfere in other countries, both militarily and economically, not to mention the odd CIA-funded regime change here and there, then you are setting a pretty low bar for other countries to get over.

Agree. However, you should also not ignore that China is no different as the next imperial player on the block, and has already shown itself plenty willing to interfere in other countries. Including New Zealand.

Moreover, at least the US has a strong constitution and legal framework that can be referenced and appealed to, rather than no base for these at all.

They can, but right now, it is not in Trump's re-election interest to strike a deal. Better to keep portraying China as the Great Satan (pun intended) and keep the bogey alive to keep firing up his constituency.
China also is happy because in the guise of a confrontation, it can build up its forces and take over the islands in dispute.
First on the list, Vietnam, to be jointly taken over by Russia and China, with a helping hand from the USA ?

There's lots of overtones of Japan in the 1930s....
Although China has thus far avoided the direct invasion strategy of the Japanese.
But remember the USA started to block trade with Japan in the late 1930s and that was a factor in fueling Japanese aggression.

The US and China fight will not stop until a new order emerges.

Will the US be able to stop China from rising to the top? Not even a chance.

The contest is real and it is essential. But your predicted outcome, xingmowang, is propagandist garbage. There is no nation on earth - including China's client states - which would welcome a Chinese 'new order'. The tyranny of fear is no match for the versatility of freedom. And China needs the world far more than the world needs Communist China.

I largely agree with you. Tho I'd argue the People's Republic is not Communism but an one party Authoritarian state which can be more captialism than the entire West in certain cases.

Sure they can. Corporate America and Authoritarian China can be a perfect match LOL

Will the CCP black out the media in Hong Kong, can they? Why don't they have the courage of their bloody convictions and hold fair elections? If this turns out badly for the people of Hong Kong, the next stop is Taiwan, then what?

The makers of US TV comedy South Park have issued a mock apology to China after the show was made largely unavailable in the country.

In a recent episode, the character Randy is subjected to forced labour and Communist Party re-education after being jailed during a visit to China.

Most South Park episodes and reviews are now unavailable online in China.

https://www.google.com/amp/s/www.bbc.co.uk/news/amp/world-asia-china-499...

Like the NBA [National Basketball Association], we welcome the Chinese censors into our homes and into our hearts," it said.

"We too love money more than freedom and democracy. Xi doesn't look just like Winnie the Pooh at all.

"Long live the Great Communist Party of China! May this autumn's sorghum [a cereal crop] harvest be bountiful! We good now China?"

Very telling and very true, and it does not bode well for us pulling back before we ruin the planet completely.

Don't worry about the planet - it'll be here long after the brown smudge of humanity has faded.

That pic - love women in uniform.

Yeah Fritz but probably the hand picked hot ones in the front and the ugly ones at the back. China can afford to wait for Trump to go, if its not by the next election its looking like impeachment before that, Trump is toast.