US, China Trade War Shelved

Trade & Policy

US, China Trade War Shelved

The US-China stand-off is over after both leaders sent top officials to hash out a deal that would end their quarrels over trade, investment and intellectual property rights

Less than three months after eliciting utter incredulity with his promise that trade wars were good and easy to win, Donald Trump showed how such conflicts are won - at least with China. It requires a sense of restraint, respect for international law, recognition of the other party's inherent rights and a willingness to bring in the heavy artillery not only for one's advantage but also in the service of mutually beneficial goals. Many of these features were not hitherto known to be core Trumpian attributes.

Over the third weekend of May, Trump's Treasury Secretary Steven Mnuchin & President Xi Jinping's economic tsar, Vice-Premier Liu He, deftly spearheaded and shepherded the two sides towards a win-win outcome that draws a red line under their recent trade, investment and intellectual property rights (IPR) quarrels.

The trade row has now effectively been shelved indefinitely; the investment and IPR-related differences have been narrowed - indeed to the extent that the Trump administration now shares an important stake in the successful implementation of the international economic dimension of Xi's third plenum reforms.

The key elements of the US-China consensus are as follows. First, China is to substantially reduce the bilateral trade deficit by markedly expanding the import of US goods and services. Natural gas imports to the tune of US$ 50 billion a year and agricultural product purchase increases in the range of 30-40% have been trumpeted. In exchange, Trump's tariff threat is to be taken off the table. This withdrawal enjoys the added virtue of keeping the US on the right side of international law. If imposed, the proposed tariffs would have been found to be rank violations of the World Trade Organisation's (WTO) most favoured nation principle, as well as the US' own self-notified tariff bindings.

Second, China is to tweak certain technology licensing measures in its foreign trade, contract and joint venture laws and regulations, which appear to discriminate against holders of foreign intellectual property rights - fully denying them their patent rights. These relate to the indemnity risk that Chinese laws compel foreign technology transferors to bear as well as laws that hinder foreign technology transferors' ability to enforce patent rights against a Chinese joint venture partner after a technology transfer contract has ended. Finally, China is to liberalise its foreign inward investment regime in advanced manufacturing sectors, including progressively relax its existing equity caps and allow full or majority ownership of companies and joint ventures. Beijing retains its inherent right to devise its industrial policies in advanced manufacturing sectors, including its "Made in China 2025" plan.