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China-US trade dispute enters second half
Dec 12, 2018

China and the United States reached a consensus to suspend tariff hikes and restart trade talks at the meeting between President Xi Jinping and his US counterpart Donald Trump in Argentina on Dec 1. Yet the Canadian police detained Meng Wanzhou, Huawei's global chief financial officer, and could deport her to the United States where she could face charges for evading US curbs on trade with Iran.

These contrasting signals show the complexity of China-US trade conflict, and since the conflict has reached a critical stage, four major changes can be expected.

From a blitz to protracted standoff

First, the trade conflict between the two largest economies has shifted from being a blitz to a stalemate. The first half of the game, which has stretched from March to November, can be seen as a fight for time and space. Taking advantage of the time window provided by tax cuts at home and China's reform pains and shrinking room for stimulus, the Trump administration adopted a "maximum pressure" strategy. The first three rounds of trade sanctions were thus carried out one after another in quick succession, each one more aggressive than the last one, with the aim of bringing China to heel.
Yet the landscape of the contest has now changed in two aspects.

To begin with, the Trump administration's strategy is taking a bite out of the US economy, made clear by volatility in the stock market, the IMF's downgrading of its US growth forecast by a large margin, as well as the mass layoff plans of leading automobile enterprises.

Also both the Republicans and the Democrats have arrived at the consensus that the US should seek to contain China's rise and safeguard US supremacy. Threats posed by the Trump administration's previous strategic arrangements targeted at China, including the Indo-Pacific Strategy, US-Mexico-Canada Agreement and the announcement it will seek trade agreements with Britain, Japan and the European Union, will be around for a long time.

In these circumstances, the two countries have bidden farewell to the illusion of a quick victory after the G20 summit and confronted the reality of a long-term stalemate as the short-term pressure starts to moderate.

From comprehensive to targeted strikes

Second, the tariff strikes on each other in the second half of their contest will be more targeted and accurate compared with the relatively comprehensive attacks before. Historically, the disparity in strength with its opponents and the convergence of interests has determined what kind of approach the US adopts in such contests. When it had a huge economic advantage and weak bonds of shared interests, it used the extreme solution of economic blockade and comprehensive Cold War against the Soviet Union. While in the 1980s, its approach against Japan was less extreme as the US' economic advantage was significantly less compared with the economic advantage it enjoyed over the Soviet Union and the two countries had more shared interests.

That the US' economic advantage to China is relatively limited and the two countries are each other's biggest market with largest potential decides that managing a comprehensive conflict is a cost neither country could afford. This is exactly why the side effects of Trump's policies were quickly amplified at home, also why the administration has slowed down its attacks.

Looking ahead, although the US will not easily scrap the trade sanctions already in place it will hesitate to upgrade the standoff to a comprehensive confrontation. The third round of sanctions targeted $267 billion worth of Chinese exports in particular is expected to cause much pain on both sides, thus is unlikely to fully materialize.

In the near future the US will probably focus on containing the development of China's high-tech sector by, for instance, imposing high tariffs on imports from China's emerging industries, cutting off the transfer of technology, confining the talent flow and freezing the overseas assets of China's core enterprises and institutions, with the ultimate goal of impeding the upgrading of China's manufacturing industry. On that account, China's relevant industries should remain alert and take precautions, and the government should offer necessary protection to key enterprises, technology, assets and talents.

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