The tough policy of trade negotiations between the United States and China

Since neither party has a trade war, why do both parties threaten a war?

The answer is simple. Although both parties may benefit from an agreement, one party could benefit more, much more, depending on the final terms.

The current stalemate is dominated by two key issues. The first is the number of Chinese mercantilist practices that will be canceled. These include tariffs on imports from America, required partnerships with Chinese companies, forced transfers of intellectual property and sometimes outright theft of trade secrets. Secondly, the question is whether the conditions are precise, applicable and taken as formal commitments by the highest institutions of China.

China's problem is that its economy depends on these unjust practices and that communist leaders benefit politically and financially. Some, like the widespread theft of Western intellectual property, are helping a lot of local businesses. Others, like the straining on foreign companies for them to accept local partners, help the party the most because it chooses the winners. As in any system of favoritism, the winners are politically connected companies that share the largesse with their benefactors. (Economists call this policy "rent extraction".)

Chinese political leaders are naturally reluctant to change these arrangements. They would not change them at all without significant external pressure, which is exactly what the United States does. Given that Beijing must reach an agreement, it would prefer informal commitments, the better for the more vague ones. Later, China could move away from them hoping that the United States will not take revenge.

US negotiators did not fall off a truckload of turnips. They know the game. That's why they want detailed and unambiguous written commitments ratified by China's highest political institutions. Equally important, the United States wants strong enforcement provisions that they can invoke unilaterally without reprisal.

The Chinese negotiators reluctantly took most of these commitments and were on the verge of concluding a final deal when, for unknown reasons, they suddenly pulled out of the key concessions two weeks ago. Their withdrawal may be a negotiating ploy or perhaps a reflection of extremist resistance in Beijing. Whatever the cause, President Trump reacted strongly, pushing current tariffs from 10 percent of the US to 25 percent of the $ 200 billion worth of Chinese goods. He has threatened to expand those who sanction tariffs to an additional $ 300 billion unless China changes course. Trump says that he has not yet made a final decision on additional rates, but his threat to impose them is credible.

As expected, China responded with higher tariffs, reaching some $ 60 billion of US exports.

Who has the leverage here? Both sides, but their strengths are different, that's why they test each other. The advantage of the United States is that China is much more dependent on our markets than we are. We can squeeze them harder. The advantage of China is that they do not have elected leaders, who are extremely sensitive to voter complaints. Dictators can usually hold longer.

The radical asymmetry of trade volumes gives Washington a tremendous weight. US producers sold about $ 180 billion worth of goods and services to China in 2018, less than a third of what Chinese producers sold us. Direct investment is also unequal. They invest more than $ 100 billion in direct investment, all protected by the rule of law. US companies have less than half of those in China, all of which are subject to strict regulation and biased courts.

These striking differences matter for trade negotiations. For China, the US market is not only important, it is vital. We are much less dependent on them. This is Trump's firm judgment, as well as his calculation that his threats are credible.

The prospect of suffering even more is crucial because this dispute could become a "war of attrition". Like all wars of this type, the winner is the side that can hold out or credibly threaten. Trump thinks it can, because China depends on the American market, the next elections will take place in a year and a half and the US economy is doing well. Growth may slow down slightly, but America can bear the effects.

America's vulnerability is not macroeconomic; it's micro-politics. Farm Republicans already feel pinched by their constituents. That's why Trump wants to compensate them. Support from Democrats, such as Senate Minority Leader Chuck Schumer (NY), and Rep. Debbie Dingell (Mich.) Can help some people, but it will lessen if the conflict continues. They claim that "Trump can not negotiate". If the stock market collapses, the pressure will increase considerably. If the economy crumbles, Trump will do it too.

China has its own political problems, many of which are rooted in the slowing of its economy. It is simply wrong to think that dictators are not worried about instability and disruption, or about attacks on their patronage system. If they did not do it, they would not have imprisoned a million Uighurs or spent half their military budget on homeland security.

Before resuming trade negotiations, Beijing leaders must solve two crucial problems: (1) How long do they think they can hold? (2) Is it more politically costly for them to change their basic economic policies or to fight for a better deal with Washington?

Saving the face, it matters. Until now, President Trump has avoided any attack on Chinese President Xi Jinping. On the contrary. He points to their "strong" relationship and blames the previous US presidents, not China, for the bad deals.

Trump knows that he can not force the problem. This is why he will keep up the pressure, threaten to increase it, avoid personal attacks (if he can) and wait for Xi to make his choice. Trump knows better than calling him first.

The two leaders will meet at the G-20 summit in Osaka, Japan, on June 28-29, and may reach an agreement there before further economic damage is caused. If they reach an agreement, you can count on Trump to credit both sides, claim that Xi is a great leader and proclaim that it is the most important trade agreement and the best since the man came out of the swamp and walked on both legs. For American farmers and technology innovators, this could be – if they can hold on.