5 years ago

China-US trade negotiations: Damage control or frontier-breaking?

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Donald J. Trump may be both rolling and reeling at this juncture of his tenure. Exonerated by the Mueller investigation report and successful in placing Treasury Under-secretary for International Affairs, David Malpass (who authored the president's China policy), as the new World Bank president, he has been high-fiving across battle-lined US states recently, hinting that an even bigger deal, the "grand-daddy" of them all, with China, is imminent. Simultaneously, though, he has been reeling, as evident in his one-year "concession" to Mexico over border-wall construction and an economy merely sputtering this first quarter.

It is not a key quarter, but with the 2020 presidential election fast approaching, if the pieces are not in place now, the desired macroeconomic picture and microeconomic results will not be in place for his trademark bravado campaign-style to resonate this time as it did the last time. At the top of the agenda is, of course, the trade deal with China, a painstakingly slow exchange that is expected to round the corner this month. It cannot be delayed, since too many farmers in his safe and critical "Red" states (Republicans) have not been happy: soya producers are hurting, and with the planting season underway (April-June in many states), lots of cheap labour, such as from Mexico or Latin American countries, will be sorely needed. Wall-building threatens the supply-lines, but since it was promised in his 2016 election campaign, when Trump returns to his supporters in mid-2020, he will need to show wall-construction and soya sales in his speeches. No wonder his 1-year "concession" last week: it pacifies US growers, puts something positive on the election agenda to share with expected voters, soothes sores in Mexican bilateral relations, and projects a more relaxed, rather than grumpy, 2019 summer.

Notice how these steps only eliminate deliberately installed hurdles last year, not a progressive proactive measure: wall-construction along the Mexico-US border, and imposing tariffs upon China. Another occasion might be needed for future planning: too many strains have accumulated to automatically scope the future; and unless these are removed, it would be foolhardy to fish in an abstract future. Clearly a wide range of discussions could emanate, from resolving the Huawei friction (China believes it is a political ploy, not the espionage nor sabotage charges hanging in the air), to coordinating global trade, especially through the World Trade Organisation (WTO).

Although the United States was pivotal in the WTO creation in the early 1990s, its trade loggerheads with European partners at the time pushed the United States deeply into a Plan B: regional trade agreements, first in the western hemisphere, through fits and starts in the mid-1980s, then more freely in the 1990s, before going global in the 21st century under a "competitive liberalism" banner. China stayed away from all of these, but not from entering the US markets. In fact, China consolidated its trade arsenal (and treasury) so much so that President Barack Obama's Trans-Pacific Partnership (TPP) sought to contain China first, admitting it subsequently only if it altered its policies. Since China pays even more lip-service to the WTO arrangements than the United States, global trade suffers: when rules and stewardship compete, trade-throttling automatically follows.

It is against this background that any China-US trade arrangement would enormously impact global trade. Both are the largest world economies, while the solid but fraying US network of trade relations faces stern challenges from China's BRI (Belt Road Initiative) network flung across a wider global spectrum. US tariffs upon Chinese goods ring harmoniously across many "emerging" or "frontier" economies, especially those in RMG (ready-made garments) exporting. Cambodia, Indonesia, Vietnam, and others profited from this trade posturing. Yet, any China-US deal impacting sectors like this may send mixed global signals.

That the rest of the world has so much to gain from China-US trade conflicts exposes the nature of the global political economy today: it is far more competitive now than before. Globally, it now really takes "two to tango" commercially: with one dominant partner, trade gets lop-sided; competition begins with two. Yet the timing is not propitious. The global economy is barely hiccupping, so much so that only yesterday the International Monetary Fund (IMF) lowered its global economic growth projections again: beneath the bullish stock market lies investor anxiety, pumped again by a Trump policy preference, this time the desire to impose tariffs on another $11 billion of European exports. Secular forces like the Brexit impasse, business uncertainty, and spiralling petroleum prices have been eating away at the sinews of global growth. By returning to normalised trading, China and the United States could, therefore, soften the confused business mindset and open up all sorts of spillovers to compensate for the transitional difficulties of the rest of the world from China-US trade-warfare.

Related to this nexus of forces is Malpass's World Bank appointment. It is an agency China has been wary of since, even by boasting the world's second largest economy, its voting share is insignificant: only about 6.01 per cent (climbing recently from 4.68 per cent), against 16.77 per cent for the United States (dipping from 16.89 per cent). The United States still retains a veto power, in addition to the tacit arrangement with Europeans of supplying World Bank leadership in exchange for handing IMF (International Monetary Fund) leadership to Europe.

This is only one of several other reasons behind China's initiation and successful progress of the Asian Infrastructural Investment Bank (AIIB), to complement its one-belt-one-road (OBOR), or BRI, project. Bangladesh jumped on the AIIB bandwagon, borrowing to develop a power project most recently, illustrating how appealing China's AIIB rationale and presence is against World Bank lending policies. Once again, such an institutional tug-of-war can be exploited by the rest of the world: aggrieved by the World Bank's retreat from the Padma bridge project, Bangladesh turned to China, and even as it ramps up the Chinese ante, it has begun returning to the World Bank, an even more glaring example of which is Imran Khan's Pakistan returning to IMF bailouts, after long criticisms of the institution, following its BRI-related debts to China.

In other words, for multilateral organisations to function freely, a China-US deal is imperative, triggering enormous ramifications for the rest of the world. The more encompassing it becomes, the more the urgency to narrow the WTO-BRI/OBOR gap; but any piecemeal end-product would only stir the simmering pot.

Unfortunately for the rest of the world, the US election calendar will be playing an outsized influence in determining these related global outcomes, especially China-US trade. This is not new. Edward Tufte showed us a half century ago how elections can be influenced through economic instruments (his key one, transfer payments, paid to voters a couple of weeks before the voting day, is not under the microscope here, but trade, because of its job-related importance today, demands attention). Populism was not an issue during his time, as it is today. The variables have changed. With the same game being played with too many actors today, populism easily creeps in the back-door as a plausible instrument for dim politicians to turn to.

Before the wolves run amok, an entire world awaits the China-US trade details with bated breath.

Dr. Imtiaz A. Hussain is Professor & Head of the Department of Global Studies & Governance at Independent University, Bangladesh.

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