Hopes for reaching a US-China trade deal have continued to diminish. Wild market swings in both equities and bonds reflect how each day seems to bring a new angle to the ongoing saga, often triggered by a Twitter barrage from US President Donald Trump. While there have been both up and down days, the underlying narrative points to a rapidly opening chasm between the Chinese and American sides.
The tariffs that started to be implemented on September 1, 2019 are only adding to a sense of growing distrust. Recent news indicates that Chinese and U.S. officials were even struggling to agree on the schedule for a planned meeting that is now scheduled to be held in early October in Washington to continue trade talks. In fact, indications are that Beijing is resolved to hunker down for a long fight, in part because Chinese officials are growing increasingly uneasy about Trump's foreign policy flip-flops. And Trump is threatening to become even tougher with China should he be reelected in 2020.
But not all hope should be lost. A productive way forward would be to focus on forging smaller deals instead of trying to reach one overarching omnibus deal, as has been the case so far. Each of these mini-deals could have a clear quid pro quo incorporated, making them independent of the larger deterioration in economic ties between the world's two biggest economic powers. Naturally, to even reach a small deal, the two sides would have to reach agreement on structured talks and a cease fire in the tariff war.
This therefore needs to be the first mini-deal: an agreement on basic terms of re-engagement among the two sides that would include several stipulations. First, a clear schedule for meetings among the two sides, ideally for two meetings every month, one in the United States (a West coast city such as Seattle could be added) and one in China; second, a cease fire in adding on new tariffs with commitments from both sides; and third, a “verbal cease fire” that would allow both sides to get down to work without fearing constant flip-flops from Trump.
A second mini-deal that has already been entertained would be to tie the temporary reprieves for Huawei in accessing US technology to large scale purchases of US agricultural goods by China. The U.S. Commerce Department granted Huawei another 90-day “temporary general license” that renewed a reprieve set to expire on August 19, 2019. This means Huawei will continue to have access to US technology and software updates for phones until mid-November 2019.
Although Trump recently excluded such a deal from upcoming trade talks, it still would make sense. Washington could offer to extend the reprieve for another 120 days for measurable purchase commitments from China for US agricultural goods in the same time period. If the purchases come through, the reprieve could be extended by another 180 days for an even larger amount of Chinese imports, and so on.
This would allow US companies to continue both high-tech and agricultural exports to China, and give a bit more certainty to Huawei in its operations, including its deployment of the Android operating system by Google. However, this deal would still keep the company on a tight leash for reviews on its effects on US national security.
Hardliners in Washington are bound to dislike this deal, but then they are dead set on undertaking full economic decoupling between the United States and China. Such an enterprise is likely to carry many unintended consequences, not least of which is the likely arrival of a much feared recession in the American economy. If the US economy starts to contract in 2020, it could truly imperil Trump's reelection chances. Talk of bad timing.
Such a mini-deal would inject a shot of much needed confidence into global markets and set the two sides up to tackle more difficult areas. The next one to be attempted could focus on currency, opening up a large bilateral currency swap line between the Federal Reserve and the People's Bank of China. I have written about this possibility earlier this year. Currency swap lines have become common after the Global Financial Crisis. In this case, such a swap line would diminish devaluation pressures on the yuan or renminbi, giving an immediate confidence boost to the Chinese currency.
This mini-deal could stipulate that if the yuan appreciates by 10 percent, then US tariffs on Chinese goods would come down by the same amount, i.e., from 30 to 20 percent and from 15 to five percent. Trump would get what he wants: a weaker dollar and a massive shot in the arm for the US economy coming from the added confidence such a deal would create.
The next mini-deal could be even tougher to reach, but important ground work has already been laid. To get the ball rolling, Beijing could withdraw its tariffs on US goods (how much would have to be negotiated) and commit to the protection of intellectual property rights, including ceasing practices of forced technology transfers. In return, the United States would lower its tariffs by 10 percentage points after the agreement is struck, and promise to fully lower all its tariffs upon the successful implementation of Chinese measures.
A side deal to this one could focus on cyber security, especially the theft of trade and technology secrets. A somewhat similar deal was reached by the Obama administration with the Chinese government. This could serve as a template, though for a truly effective arrangement, a multilateral framework for cyber security is needed.
Two major outstanding issues would then be left on the table: market access and industrial subsidies/industrial policy. The market access piece is somewhat easier, but still complex. A deal to enact mutual market access (whatever Beijing offers, Washington would reciprocate with) would actually favor the United States, since historically its markets have been quite open to investment and trade. Haggling over mutuality with both sides yielding on certain parts (excluding the Internet and national security related items, for example) could produce a deal, though it would not be easy.
The final part on industrial subsidies/industrial policy would be best left to the end. As the case of Boeing versus Airbus at the World Trade Organization shows, every single country practices forms of industrial policy with various subsidies tied to technology development. The United States could demand as a first step that Chinese practices become more transparent (something that would be beneficial for the Chinese central government, since many local and central subsidies distort the Chinese economy) and that some of the most egregious practices are stopped. In return, the United States would drop all tariffs and provide a long-term framework for China accessing U.S. technology.
The above is merely an illustration of how the “art” of many small deals could yield results. The US-China economic relationship is so complex as to defy a one-size-fits-all solution. Add on the increasing mistrust hampering both sides, and the outlook for reaching a deal is dire.
However, by beginning with small deals, each of which has a clear quid pro quo, progress is more likely. Once two or three deals (the rules of engagement, the technology access for agricultural purchases, and perhaps the currency deal or the intellectual property deal) are reached, confidence would return to financial markets and, more broadly, the global economy. And each time a new deal is reached both sides can crow about how wonderful they are in coming to an agreement. For Trump, the calculation should be simple: Why not show off multiple times instead of risking a complete breakdown?
