How the U.S.-China Trade War Reached a Turning Point

(Bloomberg) -- Since December, a temporary truce has kept the trade war between the world’s two biggest economies from escalating. Under the preliminary agreement between U.S. President Donald Trump and Chinese President Xi Jinping, the U.S. postponed indefinitely a planned increase, to 25 percent from 10 percent, in tariffs on almost half the goods it buys from China, worth some $200 billion. American and Chinese officials have been negotiating since then. The bruising dispute has already shaken the world economy and caused companies to reconfigure their supply chains.

1. What progress has been made?

China has agreed in principle to increase imports of U.S. agricultural products, along with energy, industrial products and services, as part of a path to eliminate its imbalance in trade with the U.S. That promise might form the basis of a preliminary agreement.

2. What are the sticking points?

The two sides are said to remain far apart on U.S. demands for structural reform to the heavy involvement of the state in China’s economy. Protection of intellectual property is another prime U.S. concern. China in March passed a new foreign investment law to deal with some of the issues. Trump has pledged that any deal will contain “strong enforcement language,’’ yet his aides are still figuring out what that should be -- and how to get China to sign off. Officials in Beijing are said to be pushing for the U.S. to remove tariffs on Chinese goods. It’s tough to see what the Chinese side will agree to beyond promises to buy more U.S. goods, given that it denies allegations of misbehavior including forcing foreign companies to hand over their technology. The widening U.S. government crackdown on Huawei Technologies Co., a Chinese telecommunications giant, underscores a deepening strategic competition between both countries that will persist beyond the trade war.

3. What would escalation entail?

If Trump walks, he could go forward with the higher 25 percent tariffs and other restrictions on Chinese investment in the U.S.; China could reply with countermeasures, such as diverting its purchases of goods away from the U.S. market. That could prompt Trump to follow through on threats to slap duties on a further $267 billion of goods. The risk of economic damage on both sides -- plus political damage to Trump heading into the 2020 election -- might make one or both sides reluctant to escalate.

4. Why are we in a trade war?

While Trump points to the trade deficit, increasingly it’s about a wider fight to set the rules of the global economy in the future. That’s why technology is at the heart of the dispute, evidenced by U.S. concerns about Huawei. Some argue that Trump’s touting of the large U.S. trade deficit, the difference between imports and exports, as a symbol of a declining manufacturing base and the loss of American might, is a cover story for a wider tech war. Trump aims to reduce the trade gap by both browbeating and enticing U.S. companies to import less and export more. In addition to goods from China, he’s imposed tariffs (which act like a tax on imports) on steel and aluminum from countries including allies Canada, Mexico and the European Union.

5. What’s been the impact of the trade war?

Investors and executives routinely say it’s hurt business confidence and upended supply chains. Apple, Starbucks, Volkswagen and FedEx are among companies that cited a slowing Chinese economy in their outlooks. More than 400 publicly traded Chinese companies warned on their earnings. The International Monetary Fund, cutting its forecast for the world economy for the second time in three months due in part to trade tensions, said in January that global growth would be 3.5 percent in 2019, the weakest in three years. Meanwhile the U.S. trade deficit widened in 2018 to a 10-year high of $621 billion, partly because the stronger dollar made U.S. exports pricier.

6. How has the conflict been felt in the U.S.?

American shoppers have been mostly insulated from the trade war, since inflation remains tame and the tariffs haven’t hit staples such as clothing, footwear and toys. That could change. A January report by Bank of America Corp. analysts said any escalation of the trade war “would be much more painful” for the U.S., triggering renewed market volatility and undermining investor confidence.

7. How has it been felt in China?

China’s economic slowdown deepened since the year began. Unemployment has pushed sharply higher, industrial output had its worst start to a year since 2009, and retail sales expanded at the slowest pace since 2012. An escalation in the trade dispute would raise pressure on the government to respond with higher public spending; authorities in Beijing have already promised almost 2 trillion yuan of tax cuts to stoke growth. Bloomberg Economics estimates China would avoid a 0.3 percent drag on 2019 gross domestic product if the trade truce holds. Their base case -- assuming an escalation is avoided -- is for economic growth in China to slow to 6.2 percent in 2019, down from 6.6 percent in 2018.

8. What next?

Chinese and U.S. negotiators have been working line-by-line through the text of an agreement that can be put before Trump and Xi, according to officials familiar with the matter. There’s been a lot of talk about a summit between the two leaders at some point. Trump will want a deal that boosts the stock market, and to declare victory, but Xi will not want to be portrayed as having surrendered.

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