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US-China trade war: if Trump and Xi agree ‘grandaddy’ of trade deals, here’s what comes next

After more than a year of tussling, Beijing and Washington “are rounding the turn” to achieve “the grandaddy of all” trade deals in the coming weeks, to borrow US President Donald Trump’s interesting turn of phrase.

To be sure, fretting that the deal could stall or collapse at the last minute is still valid partly because of Trump’s wilful unpredictability, but the deal is more likely to happen than not.

If anyone is looking for any fresh sign of confirmation, Trump gave one last week when he took another swing at the European Union and threatened to impose tariffs on US$11 billion worth of European imports over a long-running aircraft subsidy dispute. This appears to fit a pattern: he is confident of settling one trade fight, so he will start another one.

Readers of this column should know that this writer, for quite some time, has been assuming there will be a satisfactory conclusion to the US-China trade talks, primarily because the stakes are too high and the interests of both countries have become too deeply entwined over decades for Trump and his inner group of China hawks to pick them apart in just months.

A more intriguing question is that after the conclusion of the deal, what should China do next?

In many ways, the trade pact with Washington could provide a turning point for the Chinese leadership in Beijing to accelerate transformation of its economy at home, reshape its dynamics with the West, and truly grasp the reins as a champion on global trade – a role it has desired publicly for more than two years, though it has so far failed to act.

Interestingly, if and when the deal is signed and made public, it is not difficult to guess the reactions from critics in China and abroad. Those in China will argue that Beijing has capitulated and made too many compromises while those in the United States and elsewhere will say the deal does not go far enough.

Many China observers, who have been dismayed with Beijing’s uneven record of honouring its commitments to reform and opening up since its accession to the World Trade Organisation (WTO), tend to think the worst of its intentions and believe that Beijing will eventually balk at Washington’s tough demands. The US wants greater protection of intellectual property, a halt to forced technology transfers, and an understanding that American companies will be able to compete more freely in the Chinese market, to name just a few of its demands.

But these same observers also tend to underestimate the resolve of the Chinese leaders to undertake the painful reforms necessary to elevate the economy to a new level once the pressure at home and overseas, particularly from Washington, compels them to quit dithering and unify their thinking on the bigger picture.
A comprehensive deal with Washington is just what Beijing needs to reclaim the moral high ground in international relations.

Back in January 2017, Xi Jinping became the first Chinese president to attend the World Economic Forum in Davos, where he made an inspiring rallying call for free trade and signalled Beijing’s desire to play a greater global role, particularly as a champion of free trade at a time when Washington was turning inward and withdrawing from international agreements.

Since then, however, Beijing has failed to live up to its promises. Instead, it has found itself on the defensive as Washington tries to cobble together a united front of reluctant Western partners to push back against China’s rise, through the trade war and the brazen attempts to contain Huawei, China’s technology giant.

Some of Beijing’s problems are of its own making. It has dismayed Western business leaders, traditionally among its cheerleaders, who have complained loudly of Beijing dragging its feet on its promises of opening up markets and levelling the playing field for them.
Now it is time for Beijing to go on the offensive again.

With the conclusion of trade talks, one of the next battlegrounds will be over WTO reform. The Trump administration has long railed against the organisation, hoping to squeeze China’s preferential terms under the current rules and tamp down Beijing’s influence.

While Beijing refuses to give up its “developing country” status, which the US says has allowed China to indulge in unfair trade practices, it should also step up efforts to work with all leading members – including Washington – to undertake necessary reform of the WTO and enhance its authority and efficacy.

On top of that, China should be more proactive in seeking regional economic integration and participating in major multilateral trade pacts to expand its global leadership role in trade and investment.

For one thing, China should step up its efforts to join the new trans-pacific partnership known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which includes 11 Asia-Pacific countries. The accord, which took effect on December 30 last year, came after Trump pulled out from the original Trans-Pacific Partnership trade agreement in 2017.

According to a study by the Peterson Institute for International Economics, the CPTPP, in its current form, would generate global income gains estimated at US$147 billion annually. If China were to join, these gains would quadruple to US$632 billion, or a quarter more than in the original TPP with the US.

Of course, for China to join, it would have to make painful reforms to substantially cut back unreasonable subsidies to state-owned enterprises and market distortions, to ensure better protection of intellectual property, stop forced technology transfers, and allow foreign investors to operate more freely without local joint venture partners, among other things. But many of those issues will have been directly addressed if Washington and Beijing succeed in concluding their trade talks.

Thirdly, China can also accelerate talks with Japan and South Korea about a free-trade agreement among the three major economies in Asia. So far, after 13 rounds of talks since 2012, there has been little progress.

Fourthly, China should also enhance engagement with the EU over trade and investment to work together to counter Trump’s America

First policy and its threat to the multilateral order. Premier Li Keqiang’s trip to Brussels last week for the Europe-China Summit has sent a positive message as the joint statement contained optimistic wording for Beijing to expand market access for foreign companies.

All these international developments to bolster China’s global role and influence hinge on the Chinese leadership’s determination to undertake reforms at home.

Over the past few years, investors’ optimism has turned to frustration because of China’s repeated failure to translate words into action.

Hopefully, the conclusion of the trade talks with the US will help China confound its critics by rolling out market-opening reforms that exceed the expectations of the international community, as Chinese officials have promised over the past year.
Source: South China Morning Post

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