Hopes for a resolution to the US-China trade war were dashed in early May after the Chinese government sent the US a revised draft of the trade deal. The 150-page draft assembled over five months of intense negotiations had been cut down to 105 pages. The reason that the Chinese government gave for scrapping the deal was that the century of humiliation was over and that China would never sign another unequal treaty. Whatever the reason, negotiations have broken down, and now a quick resolution to the trade war is off the table as both sides raise the stakes.
On May 10th, the US has increased tariffs on US$250 billion worth of Chinese goods from 10 per cent to 25 per cent, as retribution for China's scrapping of the deal. Within hours of this announcement, China placed retaliatory duties on US$110 billion of imports from the US, mostly agricultural products. Both sides have made an opening move and are now preparing themselves for a protracted fight, threatening further tariffs, export bans and market restrictions.
The question remains how did the situation go from what seems to be a nearly completed deal tariffs being levied in less than a week? The answer lies in what the Chinese trade delegation removed from the draft. The Chinese leadership revised or deleted any sections of the draft that were considered 'unequal’, mostly articles that contain legally binding measures concerning reforms that will change the structure of China’s economy.
It’s questionable whether the proposed trade qualifies as an ‘unequal treaty,’ but the structural reforms it entails would shake the foundations of the Communist Party’s rule. When the People’s Republic of China was established in 1949, the party denounced the unequal treaties forced upon China by Western and Japanese interventions in 19th and early 20th century. Ending this period of history, known, as the 'century of humiliation' is a foundation of the Communist Party’s platform.
The draft deal would have banned forced technology transfers, intellectual property theft, subsidies to state-owned enterprises, and export subsidies. From China's perspective, the legal measures included to enforce these bans would have involved a level of foreign interference that is unacceptable. The outraged response in China comes not just from ideologues on the left but members of the party's rank and file. For the workers and managers at state-owned enterprises or in industries that depend on subsidies, the proposed deal threatened their livelihoods. They have made their discontent heard and while Xi might be China's paramount leader he needs the support of party leaders to approve any significant decision, support that some hardliner elements are unlikely to give to an 'unequal' deal.
President Trump is also in a precarious position, having been voted into office based on his deal-making skills and accusing China of unfair trade practices he now faces the prospect going into the 2020 election season without securing a better deal. To make matters worse, China’s tariffs on agricultural goods have hit Trump’s rural base hard, and they are counting on a successful outcome to ensure their future prosperity. This creates a problem, as Trump isn’t in a position to accept a trade deal on equal terms any more than Xi is in able to accept any agreement that resembles the unequal treaties of the past.
The last chance to prevent the trade conflict escalating further will come when Xi and Trump meet at the sidelines of the G20 Summit in Osaka later this month. In the meantime, both leaders are readying their arsenal to strengthen their hand. President Trump has indicated that the ban on Huawei Technologies doing business in the US and its imprisoned CFO will be used as bargaining chips in the next rounds of negotiations. While General Secretary Xi’s heavily publicised visit to a remote rare earth metal refinery was likely intended to remind the US that at any point China could stop exporting this mineral, which could cripple large segments of the US economy. It’s for this reason that rare earth metals are exempt from US tariffs, as China provides 90 per cent of the market.
While it’s unlikely that either side desires the conflict to escalate further neither the US or China is in a position to compromise. Trump cannot sign a deal that doesn’t deliver a big win, as it would compromise his re-election campaign. While Xi is unable to agree to any deal that his critics would perceive as a slight, an unequal treaty, as it would undermine his leadership and the Communist Party’s legitimacy. The question now is who will blink first, the President or the General Secretary and will it happen before irreparable damage occurs.
Andrew Thomson is the Trade and Investment Fellow for Young Australians in International Affairs.