On the sidelines of the G20 summit in Buenos Aires, Presidents Trump and Xi agreed to a “truce” in the trade war. The announcement was praised in both Washington and Beijing as the first sign that the United States and China might be willing to end the nearly year-long trade.
The crux of the truce is President Trump’s agreement to forestall raising tariffs on $200 billion of Chinese imports from 10 percent to 25 percent, which was originally planned to occur on January 1, 2019. In this truce, President Trump agreed to delay this increase for 90 days, starting from December 1. China in turn committed to purchasing a substantial amount of agricultural, energy, and manufacturing goods from the United States to reduce the U.S. trade deficit with China. During the 90 day period, negotiators from the United States and China will try to find a resolution to the fundamental causes of the trade war, such as forced tech transfer policies and intellectual property protections. If they fail to reach an agreement in that time, the tariff hikes will occur at the end of the 90 days.
While the announcement is a positive development and offers significant short term relief to some of them most affected industries, businesses should be wary of being overly optimistic about the agreement for a few reasons. First, it is important to remember that the agreement does not remove any of the existing tariffs – it just delays the enforcement of even higher tariffs. The 90 day delay, which in reality is only a 60 day delay since the tariffs hike wasn’t scheduled until January 1, simply gives negotiators more breathing space to conduct talks. This ties into the second reason to be cautious in interpreting the truce. With more indictments from Special Counsel Robert Mueller on the horizon and Democrats preparing to take over the House of Representatives in January, there has been speculation that President Trump felt the need for a “win” to relieve the domestic political pressure on him and improve his image after a disastrous G7 summit in June. Finally, it is incredibly unlikely that the United States and China will be able to reach a final agreement in the 90 day period – there’s just too much distance between President Trump’s demands and what China is willing to offer. China considers policies such as the subsidization of industries or tech transfer requirements essential to its strategic vision and is very unlikely to offer concessions in those areas.
Faced with these realities, companies affected by the tariffs should not get complacent and assume that the truce will lead to a permanent end to the trade war. The incoming Congress gives stakeholders an opportunity to pressure the Trump administration to end the tariffs. While many Democrats share President Trump’s concerns about China’s economic practices, most view the trade war as self-destructive and may be more willing to approve restrictions on the President’s ability to impose tariffs. The new chairman of the Senate Finance Committee, Chuck Grassley, has also expressed interest in limiting President Trump’s ability to impose tariffs in the name of national security. With these changes, companies interested in ending the trade war should redouble their congressional outreach efforts to encourage Congress to take up the issue. They should also take advantage of the next few weeks to talk to new members, whose opinions on trade issues may not be fully formed yet.