BOFIT Viikkokatsaus / BOFIT Weekly 2019/09

The lead negotiators for China and the United States met again last week in Washington, DC, to work on pressing bilateral trade issues. Talks between lower-level team officials continued this week. President Donald Trump approved the idea of giving negotiators more time to work out a deal and promised to refrain from imposing additional tariffs in early March as threatened. No new deadline for the negotiations has been announced.

Despite advances in the talks, few concrete or specific points of agreement have emerged. From the beginning, it was clear that trade talks would be quite challenging, given that cuts in government subsidies and elimination of the special privileges of state enterprises strike at the heart of China’s political and economic system. Easing market access, protecting intellectual property rights and increasing China’s purchases of US agricultural products and energy are areas where it is probably easier for the Chinese and the Americans to find common ground.

Monitoring of compliance with the agreement terms has also raised thorny issues. The parties appear to have arrived initially at an arrangement in which official at the ministry-level would engage monthly, deputy minister-level quarterly and minister-level twice a year to resolve issues, raised by e.g. firms, in implementing the agreement. American negotiators have reserved the right to raise tariffs if consultations fail to resolve observed implementation problems.

Part of a trade deal with the Trump administration requires that China transparently conduct forex market interventions and refrain from yuan devaluations for competitive advantage. While details have yet to be released, the American team claims the matter is already resolved to some extent. Suggestion to refrain from beggar-thy-neighbour devaluations to improve price competitiveness is included in the recently revised NAFTA agreement as well as in an earlier G20 declaration that also China has committed to.

The inclusion of a yuan-dollar rate in the trade agreement could cause huge problems in interpretation. China’s vast structural changes and decelerating growth will inevitably be reflected in the exchange rate. Things are complicated by the fact that China needs to adopt a more flexible exchange rate regime as a part of financial market reforms and the lifting of capital controls.