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Business Commentary Unlike Trump, China can afford to play the long game on trade

There is still a good probability that the United States and China will come to an agreement that both sides can live with simply because it is in their mutual interests to have an agreement.

FRED DUFOUR/AFP/Getty Images

The U.S.-China bilateral trade negotiations are back in the news after a brief respite, and media pundits and stock markets have reacted with predictably negative sentiment.

This recent dust-up between the two countries is not, however, a reason for alarm, notwithstanding President Donald Trump, the U.S. negotiator-in-chief, moving to increase tariffs on Chinese imports and his counterparts vowing equivalent retaliation.

In fact, the normal cadence of tough trade negotiations often brings a hard pause or break at the point when about the 90 per cent of all issues have been fully aired. That happened in the final stages of last year’s Canada-U.S.-Mexico negotiations, abetted by much Trumpian chest fluffing and thumping.

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There is still a good probability that the United States and China will come to an agreement that both sides can live with simply because it is in their mutual interests to have an agreement.

The stock-market rebound at the end of last week sensed that the tiff was more about public posturing than an imminent collapse. Indeed, both sides agreed to resume negotiations in China in the near future.

The recent flare-up hints, however, at an important change in the dynamics of the negotiations. The apparent backtracking by the Chinese side on previously agreed issues (notwithstanding the negotiating maxim that nothing is agreed until everything is agreed) can be explained by a strategic shift in their thinking that the U.S. side needs an agreement more than they do.

There is considerable evidence to support this view. For one thing, with the help of domestic stimulus measures the Chinese economy has stabilized in recent months and may be resuming a reasonable growth track despite the trade-war overhang. Further, in terms of both foreign and domestic politics, the Chinese regime cannot be seen to lose face by acquiescing to bullying.

Those factors have always been there to varying degrees. What really has changed the calculus is Mr. Trump’s increasingly fraught prospects for re-election in 2020. For him, it’s more than about just getting re-elected. Failing to do so will open him up, as a private citizen, to indictments for a likely growing list of alleged crimes.

Mr. Trump’s re-election will depend to a significant degree on his performance in the first term on his signature “America First” trade policy: So far, not great.

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The only trade agreement he can point to is a bilateral deal with South Korea that was largely a geopolitical accommodation not requiring Congressional approval.

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More importantly, Mr. Trump’s much-touted renegotiated NAFTA is by all accounts dead in the water with this Congress. The Democratically controlled House of Representatives will not give him a win under almost any circumstances. Further, generally pro free-trade Republicans are vocally unhappy about the retention of U.S. tariffs on steel and aluminum vis à vis Canada and Mexico and the resulting retaliatory tariffs on American products designed to inflict maximum political pain.

The President’s threat to give six-month notice of withdrawal from the existing NAFTA in order to force passage of the new agreement also rings hollow in the run-up to an election. Imagine the firestorm from Republicans in the more than 30 states (many Republican-controlled at federal and state levels) where Canada is their largest trading partner. The same is true for the tier of southern states that trade significantly with Mexico.

At the same time, despite the bluster, there is little progress in U.S. trade negotiations with Japan or the EU.

That means that all Mr. Trump’s trade-related eggs are in the China basket, and the Chinese side recognizes this and is acting accordingly.

Mr. Trump, the self-styled “tariff man,” has much less leverage than he claims as a means of prying concessions from the Chinese. A further escalation in U.S. tariffs accompanied by Chinese retaliation will hurt the American economy in terms of significantly higher costs to business and consumers and will inspire both a political backlash and further risk of a deteriorating economy, led by the stock market, at precisely the wrong time in the electoral cycle.

By contrast, the authoritarian Chinese regime is much better able to weather the storm of additional tariffs and, in fact, can benefit domestically by exhorting patriotism against foreign aggression. Unlike the United States, China can play the long game.

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Mr. Trump has effectively acknowledged this asymmetry in leverage in one of his recent tweets justifying additional tariffs by speculating on the Chinese hope for a less adversarial Democratic president after a deliberately drawn-out process.

Unfortunately for the world trading system, a U.S.-China deal will probably not result in the liberalizing reforms in China that conform more closely with existing World Trade Organization standards, thereby benefiting all member states. It is more likely that the deal will centre on some transactional arrangements that improve U.S. access to the Chinese market, albeit to the detriment of third parties such as Canada. As in the recently concluded NAFTA renegotiation, Mr. Trump will, however, spin marginal change as a major victory and hope voters will not know or care about reality.

Andrei Sulzenko is a former trade negotiator and is currently an Executive Fellow at the School of Public Policy, University of Calgary

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