Who Blinked First? Inside The US-China Trade Agreement— And What Needs To Happen In The 90-Day Pause

Forbes Breaking News

Dan Wang, Eurasia Group's China director, joined "Forbes Newsroom" to discuss the temporary trade agreement between China and the United States, and what needs to happen in the continuing negotiations.

Transcript

00:00Hi, everybody. I'm Brittany Lewis, a breaking news reporter here at Forbes.

00:07Joining me now is Dan Wong, Croatia Group's Director of China Research.

00:11Dan, thanks so much for joining me.

00:13Yeah, thank you for having me again.

00:15You joined me about two and a half weeks ago, and we were talking about the trade war between

00:19the United States and China. And we have seen a seismic shift since then, particularly in recent

00:26days, because over the weekend, the two countries agreed to roll back, majorly roll back the tariffs

00:31for 90 days while they continue negotiations. When you're looking at the temporary agreement,

00:36what are some of your takeaways?

00:39Well, this is certainly an unexpected result for anyone. And the market was pleasantly surprised,

00:46and there was a rally everywhere in the world. And as far as we know, the Chinese counterparty

00:53for the U.S. is also a surprise, because within two days, that's a lot of conclusions to be made.

01:00And for Chinese exporters, they finally caught a break, especially for the SMEs. And for Trump,

01:07it can also be claimed as a win, given that China also made compromises. And it will be very

01:13interesting on what's going to happen after 90 days of truce. But at this point, it does seem

01:18like the best resolvables. And it seems like, like you said, I mean, two days, it was shocking. And

01:24there's this new tone, because both sides, up until this point, were very tough. They had harsh

01:29rhetoric for the other. The United States blamed China for the escalation. China said, we're not

01:33coming to the table under duress. Now both sides are saying there was a lot of progress made in these

01:39two weeks. There was substantial talks. There's this new tone. Are you reading into that? And what does

01:44that indicate to you? I don't think it suggested a fundamental reversal in the bilateral relationship,

01:51because China is still the same China. It will still conduct industrial policies through

01:56the state subsidies. And the U.S. will still want to coerce China, especially President Trump,

02:02into this new trade regime. It wants China to eliminate a trade surplus with the U.S.,

02:08want more Chinese companies to invest in the U.S., also re-industrialize the country.

02:12But for China, a lot of things are non-negotiable. At this point, what's negotiable is actually the

02:18magnitude of the tariffs, not how much retreat that the U.S. would do when it comes to sanctions

02:25on China. We believe there will be more non-tariff barriers coming out in the future.

02:31Export control and technology ban will still very much be in place. And the 20% of fentanyl tariffs

02:37would be on the table for negotiation. But we're not even optimistic that this part

02:42of the tariff can go away eventually. So let's talk about the numbers where

02:47they stand now. They were both slashed pretty significantly, triple-digit slashing for these

02:52tariffs. The tariffs that China had on the United States' imports are down from 25% to 10%.

02:58And the United States' tariffs on Chinese imports are down from 145% to 30%.

03:04What do you make of that number? I mean, are you surprised to see those tariffs slashed by 115%

03:11a piece? Oh yeah, absolutely. And when it comes to the tariffs on China, the 10% reciprocal tariff

03:19was capped, but the 24% was suspended. And that's very much a surprise because it's the whole logic

03:25behind Trump's tariff war. It wants China to pay, so it was not on equal footing, according to him.

03:32But at this point, it just seems China is enjoying the lowest tariffs among all trading partners,

03:38including the American allies. And that's why we believe eventually, probably by the end of this

03:44year, the China-U.S. tariff from the U.S. part on China probably will go back still to the 40% to 65%

03:51range. But currently, it is relatively low. So for China, the nominal rate is 30%, but the effective

03:59rate is about 45% in terms of the tariffs subject to different sectors and also the general tariffs.

04:06Of course, we all enjoy to see this kind of break because the recessionary pressure is real.

04:13Both sides will try very hard to win their trading partners. We can see that both presidents are

04:19talking to ASEAN countries, to Latin America. So it's going to be very interesting on what's

04:25happening in the next 90 days. Global markets really rejoiced at the news that this trade war

04:31seems to be thawing. But you warned last time that with those escalating tit-for-tat tariffs,

04:36there is a real chance for recession. There is a real possibility here of inflation. How will this

04:42pause impact the Chinese economy specifically?

04:47The market is very short-sighted. As long as there is some surprise, especially platinum surprise,

04:53then the market will rally. But for China, the biggest problem is still in the job market.

04:59The export sector, although they would enjoy a temporary break because the shipment is already

05:05being rushed, we have seen this flooding phone calls to the shipping company that exporters are

05:10trying to book new containers to ship to the US. But the new orders didn't really go up that much.

05:17It's mostly the rush of shipping before the new tariff kicks in. So for Chinese economy previously,

05:24we believe that the 100-something tariffs will knock off to a percentage point of China's GDP.

05:31And the Chinese government will respond by a bigger fiscal stimulus. So in the end,

05:36we're probably looking at a GDP growth around 4%. But now, with alleviation of so much tariffs,

05:42even if it's just for 90 days, it could boost China's export significantly in the next three

05:48months. So now, instead of knocking off the two percentage points, we believe about a 1.5 percentage

05:54point will be knocked off. We're probably looking at a 4.5% of GDP growth for China.

05:59I want to read something that US Trade Representative Ambassador Greer said regarding the negotiations.

06:06He characterized them in Switzerland as this, quote,

06:09a very constructive two days. It's important to understand how quickly we were

06:13able to come to agreement, which reflects that perhaps the differences were not so large as may

06:18be thought. That being said, there was a lot of groundwork that went into these two days.

06:23What do you think that groundwork is, A? And B, what is left to really hammer out in the next 90 days?

06:29So given how conservative Chinese leadership is, there must be tons of talk before this actual

06:38meeting took place. And we do not believe that Chinese officials just improvised on the spot.

06:44So there were the non-governmental, maybe the track two or track 1.5 talk happening between top

06:52officials and former officials on trying to make the negotiation or the contact easier.

06:59And for China, what's more important is by starting this conversation, it could really see whether

07:07there's any sincerity from the US part or whether it's just a pretext for isolating China. It turned

07:14out the result is positive. So even if the two leaders may or may not meet by the end of this year,

07:23we believe the communication channel will be more open than before. At least on the China part,

07:28they know who to talk to. It is Vincent. He's really leading this whole negotiation. And China

07:33also appointed a new trade negotiator. So things are happening towards the positive side.

07:39I'm curious, I know you said earlier in this conversation, this is a win for both sides,

07:44but you and I have talked before. And we have said that President Xi nor President Trump don't want

07:50to be viewed as the person who blinked first, who caved to the other's demands. Is there a sense that

07:55either leader, either country blinked first in these negotiations as they are right now?

07:59They probably blinked together. The pain is felt very visibly in China, because the orders were

08:08canceled, the shipment, the unemployment. They're very much a big shock to the domestic economy.

08:15But for the US, the US consumers are not used to this kind of economic situation,

08:21like possible shortages, updating necessities. In the future, they might see a lot of empty shelves,

08:27especially when it comes to those big holidays, Halloween, Christmas, towards the end of the year.

08:34So I think this timing of the meeting is also happening before that, because President Trump

08:41doesn't want to deal with this new phenomenon that the domestic consumers has to endure.

08:47And I still don't believe there's any fundamental changes, although this is a temporary win for both.

08:54There is no mutual trust between China and US. It hasn't changed. And for President Xi to be willing

09:02to talk to President Trump, there has to be more certainty from President Trump. But we know that

09:08is the one thing that he cannot offer. And President Trump characterized this on Truth Social

09:14as a total reset. That's what he said about the negotiations. And he wants to see China open up

09:20for US business. Is that a non-starter for President Xi? I mean, is there a possibility that that does

09:26happen?

09:28If there's anything to be said about this Chinese government, it's surprisingly consistent in its

09:34macro policies and in its diplomacy. So unlike President Trump, President Xi is long-term and

09:41strategic. So there wouldn't be some sudden changes overnight when it comes to the economic response.

09:47So for certain response towards extreme events like COVID, for example, the country could be opened

09:56up within one week. But still, before that, there was like one year to two years of preparation.

10:01Eventually, it would give up on certain policies. For President Trump to say that this is a total

10:07reset, it is more from the US side. The tariffs are not sustainable at this level. And the US cannot

10:15find an alternative or even a combination of countries to replace China for those consumer goods or

10:23industrial inputs. So it is a realistic or pragmatic choice for Trump. But I do think he has achieved

10:32this temporary win when it comes to what China can give to the US. So a lot of things could be on the

10:40table. For example, the negotiation on the currency, the negotiation on more investment into the US, or even

10:47opening up the domestic market more for the US companies.

10:51And we're talking about, obviously, negotiations between the world's two biggest economies. And you're saying that

10:58there's still, even though they had these productive talks in Switzerland, no trust on either side. Fundamentally,

11:04not much has moved, not much has changed. Two weeks ago, you said the relationship between the United

11:09States and China is beyond salvation. As we sit here right now, do you still see it that way? A. And B,

11:16what does this temporary truth do to US-China relations?

11:21I still believe this is the case. 90 days is a very short period of time when it comes to trade diplomacy.

11:28It could easily take years or even decades. And for China-US relationship, the long-term competition

11:35will stay in place. And if you just dive into the narratives that Chinese leaders have been sticking

11:42to, it is this high-tech transformation. It is aiming to win in the long term. So the short-term

11:49concession, maybe in terms of tariffs, can happen, but China will not change course. So the United States

11:55under Trump is a different United States. It is backing away from this globalization and partially

12:02from being the global leader. And China is not going to concede in that front. It's trying very

12:08hard to win the global south and has achieved temporarily on a lot of the fronts, like the

12:13currency arrangements with the global south, especially Latin American countries, and the

12:19investment deals with a greater Asia. So the competition will be here to stay. The real question

12:28is whether we could avoid a painful war, I mean, trade war between the two countries again before

12:36any improvement happens. I mean, to that point, they're trying to jam in these conversations

12:41that could take months and years in this 90-day period because both economies are going to feel that

12:47pain, especially with the holidays just a few months away. So in this 90 days, what specifically are

12:53you looking out for next? I think one front is on the trade talks with other trading partners.

13:01For China, US importance is going down. It has gone down in the past decade gradually, but now the speed

13:11will really pick up. Europe as the second market that yields the highest profit for China's exporters

13:19will become more important. Of course, everyone is worried about China dumping excess capacity into

13:24their market and cause a higher deflationary pressure for them. And for China, this is a real

13:30problem too. So I would follow closely on how China manages currency because packing the currency with

13:38dollar at this point is not ideal since dollar is getting weaker. If Chinese yuan is also getting

13:43weaker since it has this informal peg with the dollar, it will also get weaker against the euro,

13:49against other Asian currencies. And that means even higher pressure for those countries' domestic

13:55economy. So I think the Chinese government will make some major changes in the next year or two

14:02when it comes to the currency policies, maybe pegging to a basket of currencies rather than just with

14:09dollar. And there will also be a lot of the new trade deals with, say, Japan, Korea with other

14:16neighbors and investment deals with ASEAN countries. And for the middle power caught between China and the US,

14:26the most important thing is not to take obvious sides with either, because it's going to be a big risk

14:35losing either the support from the US or the market from China.

14:39Well, there is certainly a lot to keep our eye out for in the upcoming weeks. And I hope when we do see

14:44significant developments, you come back on, provide your perspective and break them down for us.

14:49Dan, thank you so much for joining me. You're welcome back anytime.

14:52Thank you so much.

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