A group of Chinese academics have backed a “phased” approach to achieving a deal to de-escalate the 16-month trade war with the United States, in the latest indication that Beijing is veering away from an “all or nothing” stance on an agreement.

However, the report by the 10 researchers suggested that the approach will fail unless Washington abandons the unilateral approach which has seen it tear up the 

World Trade Organisation (WTO) rule-book in favour of punitive tariffs on its trading partners.

China has reciprocated in kind, with the world’s two largest trading nations now in regular contravention of WTO rules, which has been marginalised by the tit-for-tat dispute.

“Plurilateral mechanisms are the best solution, but also the most unrealistic, as the Trump administration believes in unilateralism. The WTO used to be the most important multilateral mechanism, but now finds itself is in crisis,” said Xu Qiyuan, a fellow with the Chinese Academy of Social Sciences, also a co-author of the report.

Multi-phased agreements are the best solution, but also the most unrealistic, as the Trump administration believes in unilateralism. The WTO used to be the most important multilateral mechanism, but now finds itself is in crisisXu Qiyuan

The report reflected the reality that appears to have been accepted by both sides in recent weeks: that a deal on the perceived low-hanging fruit of tariff removal in exchange for large scale purchases of agricultural goods will be easiest to achieve. However, it encouraged negotiators to persevere with more complicated issues around technology and security in the next phase, if they are serious about de-escalating the trade war.

Presenting the report at the Bund Summit in Shanghai on Tuesday, Xu said the escalation of the trade war had pushed the US-China rivalry “beyond the economy and has changed the traditional concept of security”, but said the world’s two largest economies should not decouple, and highlighted the economic pain being felt on both sides.

“There are three stages in the conflicts between the US and China, which includes traditional trade, global value chain trade and investments, and also the dual use of technology and China’s rise in this area. The third stage is critical, which is beyond the economy as it changed the nature of disputes from trade and institutional frictions to a security threat,” added Xu.

The report pointed to the level of tariff exemptions awarded to US importers of Chinese products as evidence that the American economy is feeling the strain and as hope that a deal might be achieved.

By the end of September 2019, the ratio of exclusions on the initial list of US tariffs applied to US$34 billion of Chinese goods in July 2018 was 25.1 per cent.

For the second round applied in August 2018, which initially covered US$16 billion of Chinese goods, the exemption rate was 25.7 per cent – “much higher than we had expected”, said the report.

“Give the ratio of judged cases in round two is less than 80 per cent and the exclusion rate is already 25.7 per cent, we estimate the exclusion ratio for round three and four to be much higher,” said Xu.

The US$300 billion of goods has already been reduced to US$270 billion due to exclusions. 

Tariffs of 15 per cent on US$110 billion of those goods were implemented on September 1, while 15 per cent tariffs on a second tranche of US$160 billion are due to be implemented on December 16. However, the second tranche may be postponed indefinitely as part of an interim trade deal that China and the US are close to finalising.

“In the short term, the exclusion mechanism is a corrective measure for US policy, which effectively alleviates the pressure on US manufacturers and consumers, and will also ease the pressure on China's exports to the United States,” the report said.

The Office of the United States Trade Representative announced on Monday that it is to consider extending for up to 12 months certain exclusions from additional tariffs on Chinese imports that were granted in December 2018 and are set to expire on December 28 this year.

“Both China and the US should stop escalating the tariff war. When [US President Donald] Trump applies extreme pressure, the exclusion mechanism provides the policy space. For both sides, it is a way to de-escalate the conflict with less resistance,” Xu added.

However, in the long run, the enforcement of the mechanism may hinder China’s industrial upgrade. By dangling the carrot of exclusion from tariffs, the Trump administration is giving companies affected the time to move their manufacturing out of China, therefore suppressing the development of China’s strategic industries, the report warned.

The US-China trade war has deepened over the past six months, and we are now farther away from a comprehensive resolution. The tariffs have distorted investment decisions and imposed more durable costs on all sidesJeffrey Schott

Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, who advised the US Treasury Department on international trade and energy policy from 1974 to 1982, said the report is “a little over-optimistic” as “the US government is not administratively capable of processing such large amounts of exclusions and will act very slowly on that”.

“The US-China trade war has deepened over the past six months, and we are now farther away from a comprehensive resolution. The tariffs have distorted investment decisions and imposed more durable costs on all sides – they act as a drag on growth over the medium term, even if the tariffs are eventually reduced,” Schott told the event in Shanghai.

“For the US states, the tariffs are just what Trump promised his supporters in the 2016 election. So the thought that he is going to roll back those tariffs any time soon, before facing the electorate again next year, is a risky assumption.”

Source: South China Morning Post

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