The good news is that the US and China are closer to an agreement than often assumed, says Lowy Institute's John Edwards.

SYDNEY: With resumed contact between US trade negotiator Robert Lighthizer and China’s negotiator Vice Premier Liu He, the 12th round of trade talks between the US and China may take place in Beijing before the end of July.

But the clock is now ticking very loudly. Contrary to the messaging from Beijing and Washington, both US President Donald Trump and China’s President Xi Jinping need a deal – and they need it soon.



Trump knows that, with a deal, China will buy more than a trillion dollars in additional exports from the US. Other than the corporate tax cuts in 2017, it would be the biggest policy win of his first term.

Without a deal, American consumers will be hurt by the extension of 25 per cent tariffs to another US$325 billion imports from China, this time on the kind of household goods where voters will notice higher prices. American farmers will be hit again by reduced exports to China.



American farmers are especially worried about a trade war, as they are sure to feel the hit (Photo: AFP/SCOTT OLSON)



For his part Xi needs a deal not only because US tariffs are hurting China’s exports, but also because he knows that the longer this quarrel continues the more China-based manufacturers for the US market will have to move production to Vietnam and Malaysia.

NO ADVANTAGE



Both know that unless there is a deal by the end of the year, the talks will be hostage to an unpredictable US presidential election campaign.



Trump’s opponents, Democrat and Republican, portray themselves as even more hostile to China than the President, constraining his freedom to accept a deal.



Both also know that continuing the trade quarrel is of no advantage to either side. In the first five months of this year, China’s goods exports to the US were down 12 per cent compared to the same period last year.

US goods exports to China were down even more, by 19 per cent. The US bilateral trade deficit with China accordingly increased.

That is not what the White House had in mind in initiating the quarrel a year ago.



If this chance of a deal passes it will be a long time before there is another. By then the quarrel may be very much harder to resolve, and the impact on the global economy more damaging and more extensive. On a new round of talks, therefore, much depends.



Workers load goods for export onto a crane at a port in Lianyungang, Jiangsu province, China, Jun 7, 2019. (Photo: REUTERS/Stringer)

TRADE DEMANDS

The problems are formidable but not insuperable.



The US wants a deal in which China buys at least US$200 billion a year more in imports from the US while signing up to tighter rules on intellectual property, foreign investment and trade-related subsidies.

For its part, China can go along with much of what the US wants but in return wants the 25 per cent penalty tariffs imposed on US$250 billion of China’s exports to the US removed.

China probably also wants the US to pull back on sanctions on China’s high technology businesses, such as Huawei.

Despite the generally pessimistic assessment in both Washington and Beijing, the surprise of the 11 negotiating sessions so far is how close to final agreement the two sides now are.

Visiting them in Beijing, analysts and officials had little to say about the issues everyone discussed a year ago – intellectual property protection, forced transfers of intellectual property, investment rules or tariff levels (other than the penalty tariffs each has imposed on the other).

The issue of subsidies is unclear but otherwise, the substantive issues are agreed, or close to agreement. They are covered in the draft agreement presented by the US side in April.

US President Donald Trump has claimed that Beijing wants to reach an agreement on trade issues with Washington because of China's slowing economy. (Photo: AFP/Brendan Smialowski)

READ: US-China trade war in 10 dates



Importantly, earlier US demands, impossible for China to accept, appear to have been dropped.



SOME ISSUES HAVE MOVED

On some of the issues in dispute, China has already moved.



The March National People’s Congress for example legislated to give foreign firms equal access to incentives as domestic firms (“national treatment”), to tighten intellectual property protections, and to replace discretionary approvals of foreign investment with a list of those industries in which foreign investment remains barred (a “negative list”).



The remaining big disagreements in the trade negotiation are about enforcement.

China wants the penalty tariffs removed with the agreement; the US wants to keep them on until it is satisfied China is observing the agreement.

China is willing principle buy an additional US$200 billion in imports from the US each year, but not until everything is agreed – including removing those penalty tariffs imposed by the US on China over the last year.

The US is said to want China’s commitments legislated by China; China says it will make its laws, not the US. They are important disputes, but are they so intractable they can prevent a final agreement both sides need?

Chinese President Xi Jinping touched down in Osaka, where long-running trade war with US is poised to dominate the agenda at the (Photo: G20 AFP/Kazuhiro NOGI)

LOOKING FOR COMPROMISES

In a typical trade negotiation, the two sides would at this point be looking for compromises.

For example, in the deal China might agree to buy an additional US$200 billion or more from the US each year, for a minimum of six years, but perhaps not reaching the maximum annual rate until all US penalty tariffs are removed.



The US might agree to remove penalty tariffs, on a schedule which would see them removed completely within a year or so. During that period China would implement the requirements of the agreement.

Meanwhile, the US would not impose further tariffs. Huawei would as today be denied only those US products relevant to national security.



It will be able to win public assurances but the US must be aware it is unlikely to win a right to approve or disapprove China legislation implementing any agreement. No serious nation could accept this.



The United States and China have hit each other with punitive tariffs covering more than US$360 billion in two-way trade since President Donald Trump launched a trade war last year. (Photo: AFP)

If there is to be a deal at all before the presidential race takes over, it needs to be in place when Trump and Xi meet at the APEC leader’s summit in Santiago, Chile, in mid-November.

A meeting between the two leaders on the sidelines of the UN General Assembly in September could help push things along.

John Edwards is a Senior Fellow at the Lowy Institute. He is also an Adjunct Professor with the John Curtin Institute of Public Policy at Curtin University, and a member of the board of Committee for Economic Development of Australia. This commentary first appeared on Lowy Institute's blog The Interpreter. Read it here.

