The scene is familiar: the White House Oval Office, President Donald Trump signing a large white document as Vice President Mike Pence and other high-ranking officials look on approvingly in the background. Last Wednesday, the guest and fellow signatory was the Chinese vice premier and trade representative Liu He. Trump and Liu signed the so-called Phase 1 agreement that temporarily suspends the highly contentious trade war between the United States and China.
A second agreement declaring that the trade war between the two countries must actually be brought to an end is expected to be reached only later this year, presumably following the American presidential election. The chances of this plan succeeding are not high. The forces that have been unleashed by China’s rise in the world economy, as well as by changes in the global balance of power, have simply become too powerful.
Wednesday’s interim agreement includes a small decrease in the tariffs that both countries have imposed on one another’s imports. Just two years ago, the average tariff on American imports in China was less than 8%. American tariffs on Chinese imports averaged a minimal 4%. Both are currently around 20%, and Wednesday’s agreement does virtually nothing to change that. China has pledged not to manipulate the value of its currency any longer, although it did not consider itself to be doing so in the first place. It has also committed to purchase $200 billion more in American goods and services over the first two years under the agreement. American financial services will gain more access to China, and American intellectual property will have improved protections there. However, China does not tire of pointing out the fact that, in the 19th century, the U.S. itself engaged in wide-scale violations of patents held by Britain, the major superpower at the time.
There are no fail-safe measures to monitor and enforce the agreement reached on Wednesday. A special committee will focus on it this year and create a path toward the eventual Phase 2 agreement that will help normalize relations between the two economic superpowers. There is little chance that this effort will succeed. The world is witnessing a realignment of power across the globe. By 2030, or shortly thereafter, the Chinese economy will surpass that of the United States in magnitude. China is working hard to expand its strategic, economic and financial influence.
The current clash between the United States and China is likely just the beginning. A solution is nowhere in sight. In this respect, the Trump administration is correct that China has been left unencumbered for too long, and that it continues to invoke developing country status which it has long since outgrown. China, in turn, is rightly claiming its place in the world economy.
There is a strong argument to be made that the trade war is a first step in the uncoupling of the two economies, which will result in them being less dependent on trade with one another in the future. This has two consequences. First, decreased interdependence lowers the threshold for future conflicts. Second, it will ignite a struggle over spheres of influence. The more fiercely the game is played, the more brutal the power struggles will become. The U.S. uses the dollar, which is virtually inescapable in commerce, as a weapon with which to force enterprises in other countries to comply with American foreign policy. China shields itself with access to its own enormous market, and is no longer shying away from megaphone diplomacy. Loans and investments that it has made in Asia, Africa and Latin America have helped establish and consolidate China’s power and influence.
One sometimes forgets that the Chinese economy is still smaller than that of the European Union – even without the United Kingdom. It is ironic that the EU, as the second greatest economic power in the world, should play barely any role in this conflict. The tug-of-war over the export license for the Dutch chip-machine manufacturer ASML, which wants to ship advanced machines to China, is an example of this. This is currently considered a Dutch problem, and both the U.S. and China aim to keep it that way. But a Europe that views its industry as European, its workers as European and that considers its intellectual property as collective property, is strong enough not to be squashed. The worst thing that Europe can do in the coming battle of the giants it to forget that it can also be one.
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