Is Donald Trump’s ‘little glitch’ something much, much worse?

One major uncertainty is whether China will accede to longstanding US demands that it cease subsidising its large state-owned industries with low-cost loans and cheap land.

China relationship thaws

Certainly, Beijing has taken some steps to improve its relationships with Washington, including resuming its purchases of US soybeans and reducing car tariffs back to their levels before the trade war erupted.

And Beijing has also indicated a willingness to overhaul some of its policies that disadvantage US companies, including by taking a tougher line with Chinese officials who pressure US firms to share their technology with their Chinese joint-venture partners.

Beijing has held out the carrot that US financial firms might be allowed greater access to its banking and insurance sectors.

US negotiators are understandably wary of such promises, because Beijing has made similar offers in the past without following through. As a result, the US is pushing for specific details on the changes Beijing proposes and is considering how to ensure that, this time around, Beijing delivers on its promises.

Even if the two sides can resolve this issue, there is a further uncertainty as to whether the Trump administration will be satisfied with Beijing’s offers, or whether it will continue to demand China abandon what Washington sees as its unfair trade practices, including by cutting the subsidies enjoyed by China’s huge state-owned firms.

Trump’s own advisers are split on this issue. Doves within the Trump administration – including US Treasury Secretary Steven Mnuchin – have long favoured reaching an accommodation with Beijing, warning that a full-blown trade war risks roiling global financial markets.

But hawks in the Trump administration – including US Trade Representative Robert Lighthizer – have argued for a more hardline stance, using the threat of tariffs as a way to force Beijing to stop subsidising large state-owned firms and requiring foreign firms to hand over their technological secrets to China.

Until now, the hawks have been victorious. Over the past year, investors have watched with growing anxiety as various attempts to reach a trade deal have failed, and as both sides have erected increasingly punitive tariff barriers.

If no deal is reached in the present round of negotiations, tariffs on $US200 billion ($290 billion) of Chinese imports are due to rise to 25 per cent from 10 per cent on March 2, putting pressure on US industries – including electronics – that are heavily reliant on Chinese imports, and exacerbating the slowdown in China’s economy.

But even though tariffs are clearly harming the Chinese economy – the pain that the trade war has produced for China’s export industries is now rippling through the country’s manufacturing sector – Beijing’s leadership has steadfastly refused to countenance major changes to its economic policies.

What remains to be seen is whether Trump’s own resolve to continue to push China to agree to these changes has been weakened by December’s “little glitch”.

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