China-US ‘truce’ heralds the end of the free trade era

Defying expectations, the United States and China have announced an important agreement to de-escalate bilateral trade tensions after talks in the Swiss city of Geneva. The good news is that tariff increases will be slashed.

Washington has cut duties on Chinese imports from 145% to 30%, while Beijing has reduced levies on US goods from 125% to 10%. This greatly eases bilateral anxiety, and explains why financial markets rallied.

The bad news is twofold. First, the remaining tariffs are still high by modern standards. The US average trade-weighted duty rate was 2.2% on January, while it is now estimated to be up to 17.8%. This makes it the highest tariff wall since the 1930s.

Overall, it is likely a new baseline has been set. Bilateral tariff-free trade is now a bygone era. Second, these tariff reductions will be in place for 90 days, while negotiations continue. Talks will likely include a long list of difficult-to-resolve issues.

China’s currency management policy and industrial subsidies system dominated by state-owned enterprises will be on the table. So will the many non-tariff barriers Beijing can turn on and off like a tap.

IP protection

The world’s second-largest economy is offering to buy unspecified quantities of US goods – in a repeat of a “Phase 1 deal” from Trump’s first presidency that was not implemented.

On his opening day in office in January and amid a blizzard of executive orders, Trump called for a review of that deal’s implementation. The audit found China didn’t follow through on the agriculture, finance and intellectual property protection commitments it had made.

Unless the US has now decided to capitulate to Beijing’s retaliatory actions, it is difficult to see the US being duped again.

Failure to agree on these points would reveal the ugly truth that both countries continue to impose bilateral export controls on goods deemed sensitive, such as semiconductors from the US to China and processed critical minerals from China to the US.

Timeline of US and China tariffs

Moreover, in its so-called “reciprocal” talks with other countries, the US is pressing trading partners to cut sensitive China-sourced goods from their exports destined for US markets.

Beijing is deeply unhappy about these demands and has threatened to retaliate against trading partners that adopt them.

Again, the announcement is best viewed as a truce that does not shift the structural reality that the US and China are locked into a cycle of escalating strategic competition. Yet for now, both sides have agreed to announce victory and focus on other matters.

For Washington, this means ensuring there will be consumer goods on the shelves in time for Halloween and Christmas, albeit at inflated prices. For China, it means restoring some export market access to take pressure off its increasingly ailing economy.

As neither side can vanquish the other, the likely long-term result is a frozen conflict. This will be punctuated by attempts to achieve “escalation dominance,” as that will determine who emerges with better terms. Opinions on where the balance currently lies are divided.

Basic goals

Along the way, and to use a quote widely attributed to Winston Churchill, to “jaw-jaw is better than to war-war”. Fasten your seat belts, there is more turbulence to come.

Significantly, the US has not so far changed its basic goals for all its bilateral deals. Its aim is to cut the trade deficit by reducing imports and eliminating non-tariff barriers deemed to “unfairly” target American exports.

Washington also wants to remove obstacles to digital trade and investments by tech giants and “de-risk” certain imports that it considers sensitive for national security reasons.

The agreement between the US and the United Kingdom last week clearly reflects these goals in operation. While the UK received some concessions, the remaining tariffs are higher, at 10% overall, than on April 2 and subject to US-imposed import quotas.

Share of exports subjected to US and China tariffs

Furthermore, the UK must open its market for certain goods while removing China-originating content from steel and pharmaceutical products destined for the US.

For Washington’s Pacific defense treaty allies, including Australia, nothing has changed.

Potentially difficult talks with the Trump administration lie ahead, particularly if the US decides to use Canberra’s security dependencies as leverage to wring concessions. Japan has already disavowed linking security and trade, and their progress should be closely watched.

The US has previously paused high tariffs on manufacturing nations in Southeast Asia, particularly those used by other nations as export platforms to avoid China tariffs.

Balancing acts

Vietnam, Cambodia and others will face sustained uncertainty and increasingly difficult balancing acts. The economic stakes are higher for them.

They, like the Japanese, are long-practised in the subtle arts of balancing the two giants. Still, juggling ties with both Washington and Beijing will become the act of an increasingly high-wire trapeze artist.

Peter Draper is a professor and executive director of the Institute for International Trade, and Jean Monnet Chair of Trade and Environment at the University of Adelaide. Nathan Howard Gray is a senior fellow of Institute for International Trade at the University of Adelaide.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy of China Factor.