The US-China fight began with trade. Now it’s the one thing still working for them

Tensions between the United States and China have soared as the two superpowers fight over everything from the coronavirus pandemic, human rights and Hong Kong, to who controls the technologies of the future.

But there’s at least one aspect of their relationship that seems to be on steady ground: trade. Both sides, and the recession-scarred global economy, need it to stay that way, at least for now.

“The one area we are engaging is trade,” White House adviser Larry Kudlow told reporters at the White House earlier this week. “It’s fine right now.”

A lot has changed since the two countries signed a partial trade agreement in January — nearly two years after the United States fired the first shots in a bruising trade war. That truce reduced some tariffs the US government had imposed on China while averting new ones. Beijing also agreed to buy billions of dollars worth of agricultural goods.

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The countries have blamed each other over the spread of Covid-19 as the pandemic roils the global economy, and closed a pair of consulates over a worsening national security spat. US authorities have also taken aim at several Chinese tech firms and threatened to ban the popular apps TikTok and WeChat.

Even so, January’s trade deal appears to be largely intact. Kudlow said China has “substantially” increased its purchases of US goods. During the month of July alone, China bought more than 4.6 million metric tons of soybeans from the United States, according to a CNN Business calculation using US Department of Agricultural data.

“China and the US have a history of continuing economic relations even in the face of other disagreements, on security issues or human rights,” said David Dollar, a senior fellow in the John L. Thornton China Center at the Brookings Institutionin Washington, DC. “At the moment, each country has an interest in stable economic relations.”

US and Chinese trade officials were expected to review their “phase one” deal this weekend via video conference, a senior Trump administration official and a person with direct knowledge of the status of talks told CNN earlier this week.

It’s unclear whether those talks will proceed as planned. Reuters reported Friday that the discussions will be postponed because of scheduling conflicts and the need to allow China more time to buy additional US goods, citing sources familiar. One source told Reuters that the delay didn’t reflect big problems with the deal.

Asked about the status of trade talks Friday, US President Donald Trump was cryptic.

“We’re doing very well on our trade deal,” he said. “But I feel differently about China than I’ve ever felt.”

A way of managing tensions

While Washington has hammered Beijing in recent months on tech and national security, China does have an incentive to keep at least some part of the relationship functional.

“Beijing will likely not seek to scuttle the deal,” analysts at Eurasia Group noted in a research note last month, adding that the stability of the agreement is likely to withstand rhetoric from Chinese media threatening otherwise.

“Aside from the economic risks from tariff re-escalation, the phase one deal is a way of managing tensions with Washington,” the analysts added.

Chinese officials have said as much, too.

This aerial photo shows firefighters patroling with boats at a flooded area near the Yangtze river in Zhenjiang, in China's eastern Jiangsu province on July 20.

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“China’s door for communicating with the US is always open,” Chinese diplomat Yang Jiechi, wrote in an article published by China’s Ministry of Foreign Affairs last week. “China hopes the US will cooperate to create favorable conditions for implementation of the trade deal.”

China is also wrangling with some serious economic issues of its own, and not just because of the pandemic.

Historic flooding in the country has destroyed millions of acres of farmland and threatened agricultural production. That makes preserving a relationship with a major trading partner like the United States important.

Last month’s influx of soybean purchases, for example, was likely to shore up food supplies: China imported about half as many soybeans from the United States last month as it did through the first six months of the year.

Even so, analysts have pointed out that China likely isn’t going to fulfill all of its trade commitments by the end of the year, given the fragile state of the global economy.

By the end of June, China had only purchased $40.3 billion worth of US goods covered by the phase one deal — roughly a fifth of the target for 2020, according to estimates published by Nomura.

Dollar,of the Brookings Institution, alsofinds it unrealistic for China to meet some targets.

“Aspects of the Phase 1 trade deal are simply not realistic in the current environment,” Dollar said, adding for example that its “services” commitments won’t likely be met, as that would require more Chinese tourists and students to visit the United States and spend money. “That is not going to happen,”

Trump’s choices

Faced with the possibility that China might fail to meet its promises, the Trump administration has a choice. It can either abandon the trade deal or try to make it work.

“Tearing up the deal would probably bring a negative reaction from the stock market, so Trump is likely to stick with the deal for the moment,” said Dollar, who added that Washington is likely to pressure Beijing to honor more realistic commitments, such as agricultural purchases.“He can always repudiate it later in the campaign if that seems expedient.”

The future of their trade ties, though, is far from certain. After all, Trump faces an election this fall, and could lose the presidency to Democratic challenger Joe Biden.

“The outcome of the election will alter the China/US relationship for sure,” said Mauro Guillén, professor of management at the University of Pennsylvania’s Wharton School.

If Trump wins, Guillen said, “the hawkish wing of the White House will apply even more pressure on China.” If Biden wins, “there will be an attempt to return to negotiations over technology, trade, and security,” he added.

But Guillén still believes that it’s important for the world’s two largest economies to sit down and find a solution.

“Five to 10 years down the road the world needs these two large economies and trading partners to talk, negotiate, and find an accommodation,” he said. “Otherwise, the global economy cannot work.”

– Vivian Salama contributed to this report.