What Really Happened with the Off and On-Again US-China Trade Talks?

Both the US and China are struggling to recover from the woes of a health care and economic crisis. This is not a good time for either country to escalate trade tensions. The last thing either country needs at the moment is to cause financial market, business or consumer sentiment turn negative at the moment. That would surely slow the recovery process for both countries. As a case in point, witness the reaction of US and Global financial markets when they heard White House Advisor Peter Navarro hint that the Phase 1 trade deal with China was over. Not surprisingly, the retraction and clarifications came swiftly from both U.S. President Trump and Mr. Navarro indicating that the statement was not true and that the Phase 1 trade deal remained solidly on track.

No one should forget that prior to the Covid-19 pandemic, China was expected to target its 2020 real GDP growth rate at close to 6.5%. With the negative economic impacts of Covid-19, most Economists expect that China will be lucky if it can grow its economy by 1.5% this year thereby falling short of its preferred target. Such reduced growth will undoubtedly place China under severe pressure to generate sufficient employment growth to honor its implied social contract with its people. In contrast, Washington is surely intent upon highlighting that the U.S. economy is on a path towards a full recovery ahead of the November elections. As a result, there is little doubt that both countries are strongly incentivized to support the status quo of an agreement.

And while China is unlikely to honor its full commitment to the trade deal based on the pace of its purchases of U.S. exports so far, they are likely to continue to give the impression that they are trying their best to do so. In fact, a detailed analysis conducted by the Petersen Institute estimated that Chinese purchases of U.S. exports are running at less than half the rate needed to meet the full commitment of the Phase 1 trade agreement.

What Motivates Such Behavior?

There are two schools of thought on this issue. First, some analysts speculate that China has fallen behind in their commitments because their real GDP growth rate (in 2020) is likely to come in at no more than one-fifth of what policy makers had expected. With a slower growth rate, they simply don’t need as many imports to support their economy. Purchasing those extra products that they don’t need at the moment would be viewed as being silly or irrational.

An alternative view speculates that with all the increased tensions between China and the United States, it makes little or no sense for the Chinese to behave in a way that could be perceived as rewarding Washington for all the China bashing that is taking place at the moment. If anything, by slowing down their purchases of U.S. exports, they may be sending a loud and clear message to Washington that a stronger pace of purchases will resume only if the perceived negative rhetoric towards China eases.

On the other hand, the current administration, has every incentive to highlight what I would call “The Trade Deal of the Century,” with China and do its best to salvage the integrity of the agreement as we head into the November Presidential elections. So it should come as no surprise to anyone that both countries will continue to pretend that the Phase 1 trade deal remains intact even if the full commitments of the deal are not met because to declare failure will hurt both countries in ways that neither country is willing to accept at the moment.