Trade wars take their toll on trade, on economies and on commentators!  It has been an exhausting rollercoaster ride of ups and downs.  Of tariffs, of delayed tariffs, of increased tariffs, of breakthrough, then nothing, of big promises followed by silence.

Last week probably saw the most positive announcements yet about a possible deal yet a look at the home pages of the Wall Street Journal or Financial Times on Monday morning of this week makes little mention of the breakthrough.  News has a short shelf life nowadays, but it is also showing the high degree of doubt as to whether the bold words of last week will actually translate into something meaningful.

After Liu He’s, China’s chief negotiator, and more importantly Xi Jinping’s right hand man, recent Washington DC visit, President Trump claimed “concrete progress” on a phase one deal, and announced the postponement of increased tariffs on 250 bn USD of Chinese imports.  From the Chinese side, nothing for a few days until Liu called the progress substantial and that it laid an important foundation for a phased deal.  That Liu waiting to the sidelines of a virtual reality conference in Eastern China adds a surreal twist.  It can be difficult at times to figure out the real from the virtual in the pronouncements of the President!

Phase 1 leads observers to expect a phase 2, and maybe a phase 3.  Trump had already signaled a willingness at times to first attain a partial trade deal but then reversed his view.  This latest announcement is certainly being taken as a sign that at least negotiations are back on the right track, but details are wholly lacking.  As always, the Chinese side has talked up agricultural purchases, but this is almost incidental in the broader relationship rebalance between the two countries.  The Chinese face severe food issues going forward, they are dependent on imports of soybeans to feed their population and livestock, but they are also trying to battle the deadly African swine fever which has devastated Chinese pig herds.  Numbers are hard to confirm but herd numbers are down by at least 40% and will continue to be hit.  China’s willingness to buy foodstuffs reflects a major need on their part, not a concession to the US.

In this new spirit of trust and goodwill officials are now working on the actual wording of phase 1 for a possible signing by the two leaders at the mid-November APEC summit in Chile.  Topics mentioned are of course agriculture commodities, as always, possible currency pact of deal to ensure no sharp devaluation of the Chinese yuan, and perhaps some enforcement mechanism.  Yet to write those things on one line is purely speculation and aspirational.  Only when there is an actual text and detail will it be clear what has been agreed and his commentator maintains that a meaningful deal remains as elusive as ever.  A partial deal or phase 1 deal will almost certainly be full of grand Chinese promises of more buying of American goods and opening of markets but the chances that they will willingly tie themselves to American oversight and enforcement is just not going to happen.  It runs too counter to what the Chinese Communist Party has stated very clearly as its way forward over the coming decades as it looks ahead to the centenary of the founding of the People’s Republic.

Who needs a deal more? Trump or the Chinese?  Trump of course ran on a campaign of being tough on China and after a soft start he more than lived up to that call unlike previous Presidents.  As his administration becomes seemingly ever more incoherent and chaotic the need for a “win” becomes clear.  Showing his tough approach on China can provide results will certainly be good as the election draws ever closer because beyond his large tax cuts there is little to crow about for his first term.  The recent alarm caused by his actions around Syria and the Ukraine have caused widespread concern about his administration’s competence.  Impeachment is a real risk and a China deal will no doubt shore up Republican support for him at least in the short term.  Trump and the Republicans are rightly concerned about next year’s election, but China’s problems are much more long term and structural.

Whether Trump wins a second term is no longer relevant to China.  Trump has spoken up about long terms issues around China’s trades policies, market access, IP theft, geopolitical bullying and those issues are not going away.  They have become major issues for Democratic frontrunners, but they are also well understood and lamented by China’s other trading partners.  The trade war has made it okay to call China out on unfair practices and simply calling for a tougher line when it comes to any China interaction.  Companies will not ignore China, but every company is reassessing its China strategy and goals.  Samsung has just announced that it has now moved all production of its high-end smartphones out of China.  It must be remembered that its market share in China has plummeted so it doesn’t even have a viable local business anymore but why produce anything in China when it can be subject to sanctions.  The controversy around the NBA and the Hong Kong protests is a very vivid example of the difficulties of dealing with China even when manufacturing isn’t involved.  The safe, welcoming, and predictable world which China came to accept, and in part dominate has disappeared.  The trade war has made the costs of dealing with China much higher and more complicated.  Greater friction has creep into every aspect of dealing with China and that worrying trend for China can only be checked and reduced by a deal which allows dealing with China to become acceptable again.  That external boost will do no harm for China which continues to experience a long-protracted slowdown after years of debt financed growth.  Trump may like to think China’s slowdown stems only from the trade war but the slump had already started although it was a wholly unwelcome knock.

But a phase 1 deal almost by definition can only deal with the easy things.  Agriculture and energy are the obvious ones, reduction or phase out of tariffs could well accompany that along with some other bits and pieces.  But what comes in phase 2 or 3?  Trade is the most straightforward component of the US China relationship.  The questions around IP theft and protection, and capital flows are much more contentious issues.  China’s has grand ambitions especially in almost any hi-tech area.  Whether from AI, weaponry, quantum communications, CRISPR and genetic editing China is looking to be a global leader and dominate player in every area.  It has invested heavily in all these areas although much of the work to date has been on the back of US semiconductor knowledge.  China is rapidly trying to reduce that dependency and although it hardly talks of its Made in China 2025 program anymore it does not mean it has given up those ambitions.  Why would China want to rein in those ambitions?  Which country would willing not want to be a leader in the latest hi-tech field?  What possible incentive can the US offer to wean China off such ambitions?

There is little reason to think China will willingly limit its ambitions but there are reasons to think they won’t be able to meet them but that is a different discussion from the trade war and the broad dispute with China.  It is important for America, or any of China’s trading partners to firstly understand what China wants for itself.  It makes no secret of it.  The Chinese leadership repeatedly detail what their plans and goals are but often in Party documents which can make for turgid and tough reading.  It is then important to understand how China goes about achieving its goals.  It simply does not operate in the same way as open, free market style economies.  China has employed a broad mix of private and public companies backed by subsidies and government support, outright theft of technology along with genuinely innovative ideas.  That mix was accepted in the past as China was poor and developing but it can no longer be tolerated with China as the world’s second largest economy.  Its global counterparts need to deal with China on this basis. 

Xi Jinping has continued in this mold and brought State and private companies under ever greater Party supervision.  While some outside of China worry about SOEs being State Owned Enterprises, the reality of today’s China is that all Companies are SOEs, State Overseen Companies!  How does a phase 2 or 3 agreement between two countries address such a situation?  Frankly it can’t.  The old trade models seem broken.  China’s entry into the WTO has not changed China the way it was hoped outside of China, and to the disappointment of many in China as well.  If China doesn’t change, and there seems little evidence that it will then the response to China must change.  That is not to make China the enemy.  That is not to close our eyes and somehow think China can be ignored.  There are areas of common concern where cooperation is needed whether it be on global warming or arms control but there has to be a basic understanding that China wants to play by different rules from the rest of the world.

The question facing Trump and the Democratic Party contenders is not the terms of a trade deal but a much broader national policy towards China.  It will require cooperation with global allies.  It will require government lending its voice to support corporates interest at times and that makes many both in government and corporate uneasy.  But in the case of the NBA or other companies which have been forced to kow-tow to China why should governments not support such companies in basic areas of free speech and human rights?  China has been adept at picking off companies and forcing them to chose profit over principles, it is a horrible situation to be in yet profits is the results of hardworking individuals who livelihoods can be on the line because Chinese censors decide that they don’t like something which only tangentially involves the company.

National policy to China is not just a set of rules governing trade or market access and enforcement mechanisms.  It will require balance and judgement and not blanket vetoes over every area of Chinese cooperation or engagement with Chinese Nationals.  The Chinese state has used Chinese students and researchers to steal technology, but it is a national disgrace to think that all students or researchers are spies for China.  Many of Chinese best and brightest have chosen to make a life outside of the Peoples Republic because of the freedoms and environment they find beyond the reach of the Party.  Ensuring they can fully enjoy those freedoms is vitally important.

Getting the right China policy is difficult.  It is a topic which countries will need to deal with for years to come.  To somehow hope that China can be ignored is foolish, but the Party has its own plan for China’s development but much of that runs counter to what has developed in the rest of the world.  Engaging with China brings benefits to both sides, but engagement does not mean business as usual.  There are many areas where China is completely at odds with global norms, it is important that China is called out in such cases and that open and honest dialogue is held and issues not brushed aside or always made secondary to profit.

Phase 1 will be hard enough to complete to everyone’s satisfaction but the broader China policies are still far from settled.  The next stage of China and the world’s development presents some major challenges and the past approach will prove a poor guide to readdressing the balance going forward.