Dangers of a G2 US-China trade deal for the rest of us

China and the United States have failed to reach a temporary truce in their trade war.

The 10 per cent tariffs from last September levied on US$200 billion worth of Chinese imports entering the United States have been increased to 25 per cent this month. Beijing has announced retaliation of 25 per cent tariffs on US$60 billion worth of US imports into China starting in June. More is being considered by the Trump administration. Also on the America First agenda is tariffs on automobiles and their parts from all countries. And just last week Trump made official what most already knew: Huawei will be kept out of the United States’ telecommunications sector.

The multilateral trading system — and hence global economic and political security — is at risk from Trump’s America First agenda and the US–China trade tensions.

The best case scenario for Beijing and Washington is a deal outside of the established multilateral rules that carries major direct costs to other countries and risk to the rest of the global economy. Chinese purchases of US agriculture and energy will divert trade from other suppliers and buyers. The two largest economies and trading nations will move closer to managed trade, away from freer markets, and sideline the WTO, replacing and weakening some of its core functions that hold global trade together.

Both Mr Trump and Mr Xi are looking to do a deal before or at the G20 summit in Osaka at the end of June. If they don’t, the trade war could escalate beyond trade, spread to other countries and put the global economy at further risk.

A G2 deal between the United States and China is unlikely to take into account the interests of other countries. Mr Trump prefers a divide and conquer bilateral approach with maximum US leverage in negotiations. Beijing’s priority is to do a deal to get out of the corner it’s been backed into.

As Stephen Roach explains in our feature essay this week, while it’s likely that a deal will be struck on or before the G20 summit, ‘any such agreement is likely to be superficial and offer little or no fundamental resolution to the deep-rooted conflict between the world’s two great powers’.

It will be ‘superficial because it will probably focus on the least consequential aspect of the dispute — the bilateral US–China trade imbalance‘, as Roach says, the lightning rod in the US debate. And given the bipartisan and elite hardening of views in Washington that sees China as a threat and strategic competitor, any deal is likely to be temporary.

Roach sees big changes domestically in both China and the United States as the solution to avoid an ‘economic cold war’ which will be ‘a protracted period of charges and counter-charges, including tariffs and other sanctions, that will sap the vitality of both combatants’.

Can the rest of the world do better than be bystanders as the two major powers carve up the world and Trump’s America First agenda threatens to tear down the rules-based multilateral trading system that the United States has led for the past 70 years?

Instead of waiting to see what’s left to clean up in the aftermath of a deal, leaders will need to stand up for their own core interests in the global system. But to do so against the global hegemon that, though it is a power diminished by what it now does day by day, is still the largest and most powerful country in the world is no easy job. And they’ve been used to relying on US presidents to do so until now.

The first big test will be next month at the G20 summit in Japan. The world needs a ‘Merkel moment’ similar to when German Chancellor Merkel firmly made the G20 a 19 vs 1 affair in Hamburg and defended multilateralism as host of the economic grouping. And then again with powerful symbolism in the G7 in Toronto.

Is this year’s G20 host — Japan — up to the task?

Sure, Japanese Prime Minister Shinzo Abe stepped up to fill the vacuum in global leadership and saved the Trans-Pacific Partnership after Mr Trump withdrew the United States from the regional agreement. But Japan is hemmed in by its own negotiations with the United States and trying to get through the G20 without upsetting the Americans is Mr Abe’s instinctive priority. But Mr Abe and Japan may not be able to fudge the choice between protecting the multilateral order and appeasing its security guarantor.

More than ever a coalition of countries will need to coalesce if the rules-based system is to be protected from a United States trying to withdraw from it. The rest of the world — small and medium sized countries alike — need the large countries enmeshed in rules and collective action to hold them to account. No other region has more at stake in this game than Asia and so Australia, Indonesia and South Korea will need to help Japan stand firm. Canada will also be important, as will Europe where leaders will have to rise above the backlash they face against globalisation at home and the distraction of Brexit to play a leading role.

There may be hope for collective action and it might come from Mr Trump’s threat of more tariffs on the rest of the world, as it simultaneously holds the crown jewel of the WTO hostage by threatening its dispute settlement system.

There is an opportunity for China to step into a leadership role. If it takes the interests of the multilateral system into account as it says it does, it could extend market opening to others beyond American goods, and implement the reforms at home that many want to see. China can strengthen, instead of weaken the multilateral trading system and win friends in the process.