US President Donald Trump and Chinese President Xi Jinping may have
agreed at the G20 summit in Osaka to resume trade negotiations, but the path to ending the trade war remains far from clear. After all, the two reached a
similar agreement in Buenos Aires last December and those talks ultimately failed, not least because Trump mistook China’s conciliatory attitude for weakness.
Whether Trump makes the same mistake this time remains to be seen. In any case, it is worth considering how the trade war might unfold over the coming months and years – and what China can do to protect itself.
Import tariffs, for the foreseeable future, remain steady. The agreement in Osaka kept Trump from following through on his threat to impose additional tariffs on
US$300 billion worth of Chinese exports. But it did not reverse past measures, such as the tariff hike, to 25 per cent, on
US$200 billion worth of exports in May.
While these tariffs have not yet had serious consequences for China’s economy, their effects are likely to deepen over time. The US is more likely to remove them if China refrains from
retaliating with tariffs of its own. Instead, Beijing should focus on reducing its trade surplus with the US on its own terms. And it is increasingly clear that Trump’s tariffs have done more damage to
America’s businesses and consumers than to China.
Already, opposition to Trump’s trade war is intensifying within the US. For example, the US Chamber of Commerce – one of America’s most powerful business lobbies – has called for the reversal of all tariffs imposed over the past two years. With the
2020 presidential campaign already under way, the last thing Trump needs is to stoke opposition within his own political base, let alone risk tipping the global economy into
recession.
The effects of the trade war have already spread to cross-border investment. In recent years, rising Chinese production costs have driven many foreign firms – and, increasingly, even Chinese companies – to relocate their operations to lower-cost countries like
Vietnam and Thailand.
The trade war is accelerating this process. According to Vietnam’s government, inward foreign direct investment increased by nearly 70 per cent year on year in the first five months of 2019. Meanwhile, growth in US investment in China is slowing.
The Trump administration wants US companies to leave China. It is up to China to persuade them to stay. That means improving the local investment environment, including by responding to foreign companies’ legitimate complaints – say, by enhancing
intellectual property protections – and, more broadly, strengthening adherence to
World Trade Organisation rules.
The US is also eager to exclude China’s hi-tech companies from global value chains. Trump recently announced he would allow US companies to continue to sell to Chinese tech giant
Huawei, after a months-long campaign against the company. But it remains highly unlikely that his administration will abandon its efforts to strangle China’s hi-tech industries.
China has three options. First, it could accede to US pressure to disengage from global value chains. Second, it could remain committed to integration, hoping that, thanks to existing interconnections, sanctions on Chinese hi-tech companies would also hurt their US counterparts (such as
Qualcomm). The third option is to support domestic hi-tech companies’ efforts to strengthen their own positions within global value chains and develop contingency plans.
China must also prepare for the possibility that the trade war will escalate into a
currency war. If the
renminbi comes under devaluation pressure and the People’s Bank of China does not intervene to stabilise its value against the US dollar – as it should not – the US may label China a currency manipulator. Unfortunately, there is little China can do about it.
China’s prospects for coping with financial sanctions are similarly bleak. Last month, a
US judge found three large Chinese banks in contempt of court for refusing to produce evidence for an investigation into North Korean sanctions violations.
Chinese financial institutions need to prepare for more trouble, including the risk of being blacklisted – that is, deprived of the right to use the US dollar and important services, such as the Society for Worldwide Interbank Financial Telecommunication (Swift) financial messaging service and the Clearing House Interbank Payments System (Chips).
Already, one Chinese bank is on the Correspondent Account or Payable-Through Account Sanctions (Capta) list, meaning it cannot open correspondent or payable-through accounts in the US.
Beijing can step up legislative efforts to protect Chinese banks’ interests, while encouraging Chinese financial institutions to treat compliance with US financial regulations with the utmost care. It should also continue working to internationalise the renminbi.
China remains committed to its 40-year-old process of
reform and opening up. Today, that process must focus on strengthening property rights, adhering to competitive neutrality and defending
multilateralism.
But following through on this commitment will require China to find ways to manage escalating tensions with the US and avoid a costly – and potentially devastating – reconfiguration of the global economy.
Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate 
