US and China Strike Fleeting Trade War Truce

On Saturday, Dec. 1, China and US agreed on temporary truce in the ongoing trade war between the two economic giants over dinner at Buenos Aires, where world leaders were gathered for this year’s G20 summit. US President Donald Trump announced the decision to hold off new tariffs — which were scheduled to be raised from 10% to 25% in the new year — on Chinese imports for 90 days while Chinese President Xi Jinping said China will increase Chinese purchases of American products.

While investors initially responded positively to the news of the temporary reprieve in the trade war — with the Dow Jones Industrial Average surging by 1.6 percent, the tech-heavy Nasdaq Composite index rising 1.5 percent, and the Standard and Poor’s 500 index climbing by 1.1 percent in the opening minutes of the Monday, Dec. 3 US trading day —  by the next day all three indexes were solidly red, likely due to investors realizing that the trade war between the two powers was still not conclusively settled: the Dow dropped 3.1 percent, the Nasdaq Composite shed 3.8 percent, and the S&P 500 gave up 3.2 percent at the end of the Dec. 4 trading day. As protracted trade negotiations between US and China have continued for the past two years, experts suggest that it would be unrealistic to resolve demands from both sides within the 90 days given in the truce.

Markets have been plagued by uncertainty in the lead up to the ceasefire, with the US steel and aluminium industries being strongly affected: raw material costs have increased significantly, causing disarray in supply chains.

Demands from both powers included short term concessions such as increasing imports and lowering tariffs. However, most of the demands the White House made included long term adjustments in Chinese economy, including wider market reform and protection of intellectual property. Per the White House, China agreed to “immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.”

President Trump did not hesitate to trumpet the apparent success of the meeting, with his official Twitter account posting a tweet stating “not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting.”

On the other hand, the Chinese government was silent after the Saturday dinner. It was only on Wednesday, Dec. 5, that the China’s Commerce Ministry put out a statement acknowledging for the first time that the Chinese government agreed on the 90-day truce. According to the statement, the US-China negotiations have a “clear timeline and road map,” which the Chinese government aims to quickly implement as “an agreed upon consensus.”

While it is anticipated that long term adjustment in China would not come quickly, there are already signs that the Chinese government is taking steps for the further protection of intellectual property rights. Three dozen Chinese government agencies and official bodies put out a joint statement stating 38 punishments for violating intellectual property rights — including restrictions on the violators’ access to financing via state subsidies.

Still, it is likely that other demands, such as market reform, would not be implemented quickly. William Zarit, chairman of the American Chamber of Commerce in China, pointed out that China’s discriminatory economic policies that favors domestic firms would be the most challenging area to tackle. Zarit stated that these policies “need to be addressed in order to level the playing field and have a sustainable commercial relationship based on fairness and reciprocal treatment.”

However, there are signs that Chinese President Xi is under pressure to strike a deal with the US in order to alleviate conditions stifling growth of the Chinese economy. On Wednesday, his cabinet agreed to raise unemployment tax rebates to companies that do not fire workers. According to Wall Street Journal, President Xi is allegedly facing criticism from members of the Chinese Communist Party for the trade war and slowing down the Chinese economy.

Meng Wanzhou, Huawei’s Chief Financial Officer and daughter of company founder Ren Zhengfei, attends an investment forum “Russia Calling!” in 2014. Credit: Alexander Bibik/Reuters

The integrity of the truce, however, was called into question owing to a separate development — in Canada — on the same day as the working dinner. Canadian police, acting on a request by the United States, detained Meng Wanzhou, the chief financial officer of Chinese telecommunications giant Huawei (and daughter of the founder of the company), as she was changing planes in Vancouver.

Huawei has been specifically targeted by the US in the past several months over allegations that its telecommunications equipment is used for espionage purposes by the Chinese government, with several US allies (including Australia) joining the US in annulling deals with the firm over the past year. Other Chinese firms have also faced US-led scrutiny, with tech company ZTE being subject to a US export ban this past April.

It is unclear whether or not President Trump knew of the arrest at the time of his meeting with President Xi. Chinese officials commented on the arrest of Meng on Thursday, Dec. 6, with a Chinese Foreign Ministry spokesman noting that “to detain someone without giving clear reason is an obvious violation of human rights” before demanding the immediate release of Meng.

Markets responded negatively to the news of Meng’s arrest, with Asian stock markets taking a first crack at the Dec. 6 trading day suffering significant drops: Hong Kong’s exchange fell 2.5 percent, Tokyo shed almost 2 percent, and Shanghai gave up 1.7 percent. The stock selloff rippled through European markets before ultimately manifesting itself in US markets as a sordid decline in all three major US indices: the Dow fell 3.1 percent, the Nasdaq Composite sank 3.8 percent, and the S&P 500 saw red totaling 3.2 percent.