It would be easy to see last weekend’s G20 meeting as heralding a thaw in the US-China trade war.
But sadly, it hasn’t. There are some positives. It looks increasingly likely that the US will not put in place a fresh 10-25 per cent tariff hike in January on $250bn of Chinese exports, as most had thought. It also pushes back the prospect of additional tariffs on $267bn of remaining imports to the US from China.
But that is where the optimism should end. The agreement at the weekend for a 90-day truce period in the trade war is really just a pause in the fighting, not a de-escalation.
Three months is not enough time to bridge the differences, even if both nations acted in good will. And ominous signs of a disconnect have already appeared.
Official communications from China did not recognise the 90-day deadline, while there has been no corroboration on Donald Trump’s claim that the Chinese will reduce auto tariffs.
Furthermore, the domestic agendas of both Presidents mean that the two countries remain on a collision course.
The US has two broad aims.
One is to help restore jobs in domestic manufacturing. This is a direct appeal to the blue-collar workers who form the core of Trump’s support base.
The other is to rebalance the diplomatic and economic relationship with China. Both objectives are underpinned by a belief that the terms of trade with China are not “fair”.
President Xi Jinping has his own objectives for China. The “One Belt One Road” initiative is the largest attempt going on in the world by any country to extend its influence far beyond its borders. It has trade on Chinese terms at its very core.
Meanwhile, China is pressing on with its “Made in China 2025” initiative. The industrial policy is an ambitious attempt to expand its high-tech sector and establish an advanced manufacturing base.
China’s view is that this is a bold attempt to borrow from the industrial policies of other countries to establish the industries that will allow it to compete in a fast-evolving world economy. The US sees it not only as a threat to US companies, but also as a huge security risk.
A trade war is the last thing the global economy needs. The medium-term outlook is already dim, with weak productivity growth, persistent global imbalances, rising financial vulnerabilities and income inequality.
Trump is unlikely to change tack unless there is some domestic political backlash to his global agenda, a really disruptive bout of financial market volatility, or if US growth hits the buffers.
The midterm elections suggest that his domestic audience is relatively supportive of the more confrontational approach towards China. With two years of the presidency remaining, it is unlikely that he will seek to declare victory and move on.
A slowdown in the US economy would be more likely to force Trump to change his tune. However, the trade measures have yet to meaningfully bite US growth, with the G20 deal simply a stay of execution.
On Xi’s side, at a broad strategic level, China does not want to be seen to concede to what it might regard as US bullying tactics.
However, a global downturn would complicate China’s already difficult task of engineering a controlled slowdown in its economy.
The problem is that few of its proposed concessions are likely to appease Trump’s leadership team or his domestic audience. Appeasement could simply lead to more demands.
Without a resolution in sight, an economic slowdown may be inevitable. The irony is that the blue-collar workers who support Trump will be among the hardest hit.
There are no winners in trade wars, only compromises. Sadly we cannot expect many of these soon.