• Bryan

G20 Japan Truce: Don't Expect US-China Trade War To End Soon

President Trump and China's Xi Jingping have agreed to resume the stalled trade talks between the US and China, which looks like good news for the global economy. 

But is it really? I am not so sure because we have been here before. Remember the previous G20 summit in Argentina in 2018? Trump and Xi Jingping also agreed to put a hold on imposing tariffs and counter tariffs, and a 90-day truce to create the environment for working out a deal.

Trump eventually lost patience with what he saw as China shifting its position and reneging on details of an emerging deal. And like Groundhog Day, there is another truce.

Although the truce includes some concessions on US companies being able to trade with Chinese tech giant Huawei, the core issues between the two countries remain unresolved.

Trade Deficit

In 2018, the US imported $539 billion worth of Chinese goods, while China imported just over $120 billion of US goods. Trump views this imbalance in trade as unfair and an example of how other countries are 'taking advantage of the US'. 

The deficit has built up over the years, especially in the area of manufactured goods like consumer electronics, with lower production costs in China.

The US no longer produces some of these consumer electronics enjoyed by Americans, and therefore it's not going to be easy to address the deficit.

Commercial Espionage

Successive US governments have tried to address China's espionage activities against the US business sector as well as academic institutions that are involved in cutting-edge technologies. 

China has used its intelligence services to steal blueprints for patented innovations, which end up being manufactured in China with a complete disregard or intellectual property and patent rights.

It is believed that this costs the US between $200 and $600 billion a year.

Foreign Direct Investments

China restricts foreign investors from entering some sectors of the economy, such as car production. Any foreign investor that wants to make cars in China has to partner with a local Chinese investor, who must be the majority owner of the venture.

The Chinese company then has access rights to the intellectual property of the foreign partner, which leads to the Chinese manufacturing domestic products based the intellectual property.

State Corporate Subsidies

In 2018, China paid about $22 billion in subsidies to Chinese domestic listed companies - these subsidies are at a record high, and the US government is very unhappy about it.

The US points out that such support from the state to Chinese companies gives them an unfair advantage over US and other foreign competitors.

One of the largest recipients of government support is the car production sector, which has seen a significant drop in car sales. 

What Happens Now?

These Chinese policies have put US and other foreign investors wishing to do business in China at a disadvantage, but have helped China's explosive economic growth over the last 30 years.

We are probably at a major crossroads now, and the current US-China trade war has hurt China more than the US. Significantly, Trump believes that he has the upper hand and can go on indefinitely with the dispute. 

Xi Jingping and China will have to make a calculation on whether China can continue to take the hit from tariffs, as its economy continues to slow down, or be prepared to offer real and meaningful concessions to the US. Either way, there is economic pain for China.

All that talk by Chinese officials about a 'win-win' outcome in negotiations does not apply here, given that China's growth has largely been based on practices that the current US president has decided that he will no longer tolerate.

Just like a cease fire in a military confrontation, the truce between the two countries only buys time for the two countries to try and work out answers to the significant differences between them. And it's not going to be easy.