BOFIT Viikkokatsaus / BOFIT Weekly 2018/19

On May 3 and 4, president Trump's trade policy delegation, led by US treasury secretary Steve Mnuchin, visited Beijing to assuage tensions in the current bilateral trade dispute. The main takeaway from the meetings was that the parties agreed to keep talking. In some respects, trade relations between the two countries seemed to take a turn for the worse, with the Americans presenting additional demands and China responding with its own new demands.

The US now wants to reduce its annual bilateral goods and services trade deficit with China by $200 billion a year by 2020. The Trump administration had earlier asked for a reduction by $100 billion a year within 12 months. The request is not small – the 2017 imbalance was $337 billion. Bloomberg reports that the US also reiterated earlier demands that China open up its markets and cut tariffs, that Chinese firms desist from further IP violations and that China drop the subsidy elements of its "Made in China 2025" industrial policy.

China said US firms would only get to enjoy opening of its markets if the US, among other things, ends restrictions aimed at Chinese technology firms, refrains from raising tariffs and grants China market economy status in the WTO.

The lengthening lists of demands from both sides highlights the seriousness of the situation. The US decision to focus on direct and immediate reduction of its trade deficit with China is both unworkable and counterproductive. Indeed, it endangers the legitimate goals of accelerating China's opening and eliminating existing protectionist schemes. One of the biggest threats from the current situation is that the countries go through with customs duty hikes and launch into a full-blown trade war.

Bilateral talks will continue in Washington DC next week, when a delegation led by Chinese vice-premier Liu He arrives.