Xi-Trump G-20 Meeting Produces Trade Truce

China and the United States signal another truce in the trade war, but existing tariffs--and seemingly irreconcilable demands--still remain.

By Keith Johnson, a senior staff writer at Foreign Policy.
U.S. President Donald Trump and Chinese President Xi Jinping attend a state dinner in Beijing on Nov. 9, 2017.
U.S. President Donald Trump and Chinese President Xi Jinping attend a state dinner in Beijing on Nov. 9, 2017. Thomas Peter/Getty Images

U.S. President Donald Trump and Chinese President Xi Jinping secured at least a temporary trade truce in their highly-anticipated meeting at the G-20 in Japan over the weekend. But rising protectionism and lingering trade tensions continue to act as a brake on global growth.

Trump and Xi met early Saturday in Osaka, Japan, in a bid to break the deadlock that stalled once promising trade talks between the two sides. Hanging over the meeting—and helping make it happen in the first place—was Trump’s threat to levy stiff tariffs on another $300 billion worth of Chinese goods, a move that worried markets and frightened businesses. While the Trump-Xi sit-down seemed a sign that the two sides had agreed to hold off on any additional tariffs for now, the U.S. president was coy on Friday, saying he could still impose heavy tariffs if the two leaders couldn’t reach some sort of agreement.

In the end, the two sides agreed to hold off on further trade escalation while they resume talks that have broken down several times before. While talks resume, the United States will temporarily freeze the additional tariffs on $300 billion of Chinese goods–though with no remission of existing U.S. tariffs–and hope a vague Chinese commitment to buy more U.S. products materializes.

The fundamental problem as the two countries head back to the table is that the two sides are at an impasse, and for now that doesn’t seem to bother Trump, who often projects the idea that reducing trade with China is good for America (even though the economic data show otherwise).

China has repeatedly signaled what it needs to see in order to sign off on a comprehensive trade agreement with the United States, including the removal of existing tariffs, reasonable Chinese purchases of U.S. goods, and an end to U.S. technology restrictions on Huawei, the Chinese telecoms giant. The United States, for its part, wants to keep tariffs as leverage, sharply ramp up Chinese purchases of U.S. goods, and reshape how Beijing runs its economy—and few in the administration or Congress are willing to use Huawei’s alleged national security risks as a bargaining chip for soybean exports.

Trump said he would allow, for now, the continued sale of U.S. technology to Huawei while the two countries try to get trade talks back on a productive footing. But the decision prompted pushback from lawmakers from both sides of the aisle, and the Senate could aim for veto-proof legislation that would enforce the U.S. technology ban.

“China is making it clear that, in some sense, it is willing to meet the U.S. halfway,” said David Dollar, a China expert at the Brookings Institution. “The question is, is Trump ready to accept a deal where he would be clearly compromising, or is it in his interests to continue to play hardball?”

One possible changing factor is that Trump, after two years of trade wars that have cost U.S. farmers dearly and raised costs for U.S. manufacturers, needs to be able to point to some trade victory heading into next year’s reelection campaign. That’s one reason that many trade experts fear he will jettison the more ambitious U.S. demands—that China curb its theft of intellectual property (IP) and dial back its trade-distorting policies—in exchange for recovering those lost markets for U.S. soybeans and other products.

“The president is not interested in structural change—that is a decade-long process,” said Derek Scissors, an expert on China trade at the American Enterprise Institute. “[U.S. Trade Representative Robert] Lighthizer is, so we’re hitting the Chinese with two major demands at once. They badly need to keep stealing and coercing IP over the longer term and don’t have enough time now to make the hefty purchases the president wants before September 2020.”

“The true options are small deal or no deal,” he added.

The Trump-Xi meeting had broader implications than trade relations between the two giants. Global stock markets are holding their collective breath awaiting the outcome of the talks. U.S. companies are pleading with the administration not to apply the next tranche of tariffs, which would hurt both U.S. manufacturers and consumers and could even drive business to other countries. Firms are scrambling to adjust their supply chains to avoid protective tariffs, while trade flows between other countries are being disrupted by the U.S.-China fight.

The International Monetary Fund warned this month that a full-scale trade war between the United States and China could shave half a percentage point off of global GDP growth. Angel Gurría, the head of the Organization for Economic Cooperation and Development, said this week that any worsening of the U.S.-China spat would be “very, very destructive” and “would spill over to practically every single economy in the world.”

After the announcement of the Osaka truce, Christine Lagarde, the managing director of the International Monetary Fund, warned that trade uncertainties (and existing tariffs) still abound, and still threaten global growth.

The biggest immediate issue for the talks was Trump’s threat to apply 25 percent tariffs on the remaining $300 billion worth of Chinese imports that so far haven’t been targeted during the trade war. Xi, in preliminary discussions with other world leaders in Japan, has railed against “bullying” and protectionism, though without citing Trump by name. The U.S. president, a day before his meeting with Xi, said he hadn’t promised to shelve the tariffs and their implementation or not still depends on the outcome of the meeting.

Additionally, China wants relief from existing U.S. tariffs on $200 billion worth of Chinese goods, which have dragged down Chinese exports and weakened factory output, contributing to a slowdown in the Chinese economy. But U.S. trade officials, led by Lighthizer, have long maintained that some tariffs must be kept in place to ensure China’s compliance with any trade agreement. For now, those tariffs will remain in place.

Ironically, the tariffs, which in Trump’s view are ultimately a way to help shore up America’s trade balance, are doing the exact opposite. While imports from China have fallen, Dollar notes, so have U.S. exports to China due to Chinese retaliation. Meanwhile, exports to the United States from other major trading partners have all risen, making the U.S. trade deficit even bigger.

“We’ve been through this before historically, and we got a predictable result,” he said.

But for China, an even larger long-term worry is the U.S. crackdown on Huawei, based on fears that the telecoms company’s equipment could represent a cybersecurity threat for countries that install it. The Trump administration has taken steps to cut Huawei off from its vital U.S. technology suppliers (while simultaneously targeting other Chinese tech firms with similar restrictions), potentially kneecapping China’s global tech ambitions.

The Wall Street Journal reported that China would seek relief for Huawei as one of its key requests in the meeting with Trump, though administration officials said there were no preconditions to the talks. Many lawmakers are adamantly opposed to offering any exemptions for Huawei in exchange for progress in the trade talks, even though Trump himself has given Huawei a technology lifeline for now.

Finally, the two sides are at odds over China’s pledge to buy more agricultural goods and energy from the United States. Last year, the two sides were close to an agreement to boost U.S. commodity exports by about $70 billion, but then talks fell through. Since then, U.S. ambitions have grown, and officials talk of getting China to commit to as much as $200 billion or more in purchases every year (up from about $120 billion last year).

Meanwhile, Chinese leaders, backed by Chinese media, have repeatedly tried to tone down U.S. expectations, insisting that purchases be “reasonable” and in answer to China’s actual needs.

“Xi has been clear that purchases have to be in line with actual demand and not just displace goods from elsewhere,” Dollar said.  While Trump touted the “tremendous” amounts of U.S. farm goods that China plans to buy, official Chinese media reports downplayed the size and firmness of any commitments.

Both Xi and Trump also had to navigate domestic political constraints while in Osaka. Xi faces pushback from state-owned firms that are reluctant to open up to foreign competition, as well as nationalists irate with the scope of U.S. demands to overhaul China’s entire economic model. The Communist Party newspaper has criticized what it calls U.S. efforts to undermine China’s development, while Foreign Ministry officials decry “economic terrorism.”

As Trump and Xi stumbled their way to a trade truce this weekend, the ultimate irony is that, in the midst of the trade war, China has opened its economy, modernized investment laws, and reduced some trade barriers—but for countries other than the United States. Chad Bown and colleagues at the Peterson Institute for International Economics recently noted how China’s import tariffs for goods from countries around the world have fallen—while tariffs for U.S. goods have more than doubled.

“They are opening up the economy and lowering barriers, and Europeans and others are taking advantage of it, and U.S. firms are left out,” Dollar said.

This article was updated early Sunday, Jun. 30, 2019.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP