‘Ceasefire’ and beyond

The official-level trade negotiations that followed the truce on the U.S.-China tariff wars have not made headway, but the two sides are willing to stay engaged. However, vulnerabilities abound.

Published : Jan 30, 2019 12:30 IST

Outside a bank in Beijing. GDP figures from the fourth quarter of 2018 show that China’s economic growth rate has been the slowest since 1990.

Outside a bank in Beijing. GDP figures from the fourth quarter of 2018 show that China’s economic growth rate has been the slowest since 1990.

I f you ask Chinese officials what they make of the United States’ tariffs on China, they—privately—roll their eyes. No question that China and the U.S. have, over the last four decades, been intertwined with each other’s economic fortunes. U.S.-based multinationals migrated to China to take advantage of Chinese skilled workers, whose claim on wages was far lower than that of the U.S. workers. The goods produced in these China-based factories became an essential part of the U.S. consumer market, where stagnant wages for the past 40 years were mollified by relatively inexpensive Chinese products.

A leading official from the International Monetary Fund said that the U.S.-China trade relationship was “satanic”—the goods that U.S. firms produce in China are purchased in the U.S. by consumers who borrow money from China to maintain their standard of living. No wonder that Chinese officials smirk at this discussion. China has been lending money to the U.S. population to buy goods produced in China for a generation. It is unlikely that any trade war will immediately undo that “satanic” relationship.

In 2011, long before he became President, Donald Trump tweeted: “China is neither an ally or a friend—they want to beat us and own our country.” This kind of attitude defined Trump’s presidential campaign. His rhetoric became sharper, with phrases such as “We can’t continue to allow China to rape our country” (2016). No doubt the haemorrhaging of manufacturing and the phenomenon of business process outsourcing hit the U.S. blue- and white-collar sectors hard. Careers began to disappear as precarious work took hold. Frustration with globalisation careened through sections of the former U.S. manufacturing and business processing belts from Ohio to Pennsylvania.

Political opportunity

Trump saw this as a political opportunity. China became the enemy. It was an illusory enemy. Trump had no political appetite to raise more fundamental questions about how capitalist firms had built a global commodity chain that undermined workers for the sake of profit. He was not going to raise the matter that U.S. firms such as Apple and Nike did not manufacture anything but had outsourced all production along a commodity chain that impoverished workers. Trump went to the States hardest hit by outsourcing and campaigned against China. That was the red meat that he threw to a population hungry for some answers. It was the wrong answer, but at least it seemed to be an answer.

Early in his presidency, Trump seemed to want to make peace with the Chinese leadership, who had been disturbed by his anti-China rhetoric. China’s President Xi Jinping came to visit Trump at Mar-a-Lago in 2016, where they set up a 100-day action plan to resolve all trade issues. A year later, China opened its agricultural sector as well as its financial markets to U.S. firms. In November 2017, Trump went to China, where he seemed to suggest that all was well and that the Chinese government was collaborating with the U.S. Trade Representative to settle differences over steel and aluminium imports as well as intellectual property rights and technology transfer.

In 2018, tension sat below the surface. Trump had gone too far in the campaign with his promises, and he was eager to keep them. He needed to show that he was being tough with China and that his hard bargaining would somehow bring manufacturing back to the U.S. The return of manufacturing on the old scale is impossible as long as the global commodity chain exists. When former U.S. President Barack Obama asked former Apple boss Steve Jobs if his products could be made in the U.S., Jobs was unequivocal: there was no way that those products could be made in the U.S., nor was there any way for that kind of manufacturing to return to the U.S. The cost of labour would be too expensive and the demands on workers—with the brutality inflicted upon them—too high. No U.S. worker would easily tolerate such conditions.

Despite the steady negotiations in the back rooms between trade representatives from the U.S. and China, Trump went forward in March 2018 with a memorandum that included a case against China at the World Trade Organisation (WTO), restrictions on investments in technology sectors and tariffs on Chinese products ranging from aerospace technology to information technology. From March to May 2018, the U.S. and Chinese governments escalated a tariff war that began with U.S. tariffs on steel and then went into Chinese tariffs on goods produced in U.S. congressional districts with close races for Republicans. Talks continued, but these were farcical. In May, the U.S. trade team told the Chinese that the trade gap must be reduced by $200 billion by the end of Trump’s first term. The lack of seriousness stumped the Chinese negotiators.

The midterm elections in the U.S. were held in November 2018. Misery bedevilled Trump. Investigations into his presidential campaign gripped the news cycle. Trump reached for fear and hate to build his majority. As The Washington Post put it, Trump “settled on fear—laced with falsehoods and racially tinged rhetoric —to help lift his party”. He pointed his finger at Mexico, demanding once more that a wall be built on the U.S.-Mexico border. The frenzy that he whipped up has now resulted in the longest U.S. government shutdown, with Trump insistent upon government funds to build this wall. Trump also pointed a finger at China, building up popular support to assert that China—and not the dynamic of capitalism—was responsible for job loss and precarious work in the U.S.

In early July 2018, as part of this campaign process, Trump’s government slapped a 25 per cent tariff on 818 imported Chinese products with a total value of $34 billion. The Chinese hastily responded with a 25 per cent tariff on 545 goods with an identical total value. A few days later, the U.S. released a second list of 6,000 commodities worth $200 billion that were to face a 10 per cent tariff. It was hard to keep track of the various lists released by the U.S. and by China. By August 2018, the lists were long and the outcomes unpredictable. China took the U.S. to the WTO to complain about the U.S. tariffs on solar panels. It was tit for tat, escalation upon escalation. In late August 2018, the Under Secretary of the U.S. Treasury, David Malpass, met with the Vice Minister of the Chinese Commerce Ministry, Wang Shouwen, in Washington, D.C., to find a way out of the impasse. It was clear to both sides that this was a futile trade war. Deeper structural issues were at play here. Tariffs would not solve them. Over the rest of 2018, the U.S. and China met several times to find an exit. Nothing like that was possible as long as Trump continued to suggest that China was the problem for declining living standards in the U.S. At best, the word bandied about was “ceasefire”. In November, after many failed attempts to hold talks, U.S. Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He agreed to a “ceasefire”.

Trump and Xi Jinping met in Buenos Aires on the sidelines of the G20 summit in December 2018. They seemed to agree that no new tariffs would be imposed. A truce was put in place until March 1, 2019. The major outcome of this conversation was the trade talks that began in Beijing on January 7. The two-day meeting extended into a third day as the negotiators felt that more time was needed to clarify the issues on the table. The teams broke up the issues into two parts: trade imbalances, which impact certain key sectors of the trade between the two countries, and structural imbalances, which include intellectual property and technology transfer. Neither of the tracks saw any major breakthrough. The U.S. wanted to have regular reviews of China’s progress on trade reforms. The Chinese opposed this kind of surveillance of their economy. They felt it would be a humiliation, a return to colonial days.

Vice Premier Liu He made a surprise visit to the Beijing talks, involving mid-level trade officials. His visit, said a U.S. negotiator, boosted their confidence. Vice Premier He will be in Washington, D.C., on January 30 and 31 to continue a high-level negotiation on trade. “Things are going well with China on trade,” Trump said outside the White House. Rumours filtered out that some tariffs would be lifted. These were later denied. But they had the requisite effect. They suggested that an exit from the trade wars might be possible. Eswar Prasad, who was the China director at the International Monetary Fund, said a deal would be more than likely. Some kind of deal, Prasad said, would allow “both sides some breathing room by de-escalating hostilities”. Whether Trump would be willing to sacrifice his political commitments is the real question.

China certainly wants to make a deal. Gross domestic product figures from the fourth quarter of 2018 show that China’s economic growth rate has been the slowest since 1990. China could very well undertake massive stimulus spending, as it did in 2009 to avert the global financial crisis. But there seems to be no likelihood of such spending.

Vulnerabilities abound. The Chinese government knows that its entire trade model is premised on low wages in its manufacturing sector. Marxist students, inspired by Xi Jinping’s call for a return to Marxism, went to Shenzhen, the heart of Chinese manufacturing. Workers at a Jasic Technology factory had indicated that they wanted to build a trade union. The students, who had read their Marx carefully in the state-mandated Institutes of Marxism, went to offer their solidarity with the workers. They came from elite institutions such as Peking University, Sun Yat-sen University and Tsinghua University. The crackdown against the students was harsh. Their leaders were arrested, and the students threatened. But they seem undaunted. They have picked at the scab of the Chinese growth model—the super-exploitation of the Chinese worker in order to build profits for U.S. firms. It is this complexity that Trump does not seem to understand.

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