It was China’s counter to Trump’s tariffs, the US restrictions of semiconductor export to China and the power of the US dollar in global trade and finance (an extremely potent one) that gave it enormous leverage in the trade negotiations.
According to Bessent, China might defer the introduction of its tighter export controls for a year “while they re-examine it”. It would, of course, retain the option of reintroducing them at any point should the relationship with the US flare up again.
Chinese President Xi Jinping. His country has flexed its biggest trade muscle against the US.Credit: Getty Images
What would the US gain in return for China not (yet) deploying the most powerful trade weapon in it its armoury?
Again, according to Bessent, China’s negotiators have agreed to make “substantial” purchases of US soybeans.
Ever since Trump’s first trade war, in 2018-19, China has been reducing its purchases of soybeans from American farmers.
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The US once accounted for about half China’s soybean imports. Last year it was less than 20 per cent, and in the latest harvest season not a single bean has been bought. Instead, more than 90 per cent of China’s imports are now from Brazil, along with some recent purchases from Argentina.
That – particularly the purchases from Argentina while the Trump administration is spending tens of billions of dollars trying to prop up the Argentinian peso in an attempt to bolster the political fortunes of Trump’s friend and political fellow-traveller, Javier Milei – has caused a bitter backlash from US soybean producers.
A resumption of the US-China soybean trade might help placate those Midwestern farmers, who form a core political constituency for Trump, though it is unlikely that the US will ever regain the share of China’s market that it had before Trump started his trade wars.
China has essentially locked up all the soybeans it needs for this year and a significant proportion of next year’s needs and, in any case, is unlikely to restore any level of dependence on the US for an essential element of its food chain.
In 2020, after the US and China signed their “phase one” trade deal that ended the first of Trump’s trade wars, there was an initial surge in China’s soybean purchases from the US. But it quickly fell away and China failed to meet the $US200 billion commitment it made to buy not just soybeans, but other American products.
It bought less than 60 per cent of what it had committed to and less than it had imported from America before the trade war began.
Still, if buying some soybeans from the US, deferring implementation of its rare earths export controls, and co-operating on trying to stem the fentanyl trade buys it relief from US tariffs – including the 20 per cent surcharge related to its role in the fentanyl supply chain – means the shipping charges are abolished and China achieves some relaxation of the US restrictions on semiconductor exports, Xi would consider it a win.
Trump, of course, is more concerned about being able to say he’s done a deal rather than focusing on its quality.
Along with the negotiations with China, the US unveiled framework deals with Vietnam, Malaysia, Thailand and Cambodia, under which many of their exports to the US would be exempt from Trump’s reciprocal tariffs in exchange for preferential market access for US industrial and agricultural products.
No details were released on which exports from the South-East Asian countries would be excluded from the US tariffs, which are 19 per cent for Malaysia, Thailand and Cambodia and 20 per cent for Vietnam.
The leverage in these negotiations is, as the US seems to have belatedly realised, quite lopsided.
Ironically, had Trump not, in 2017, withdrawn the US from the Trans-Pacific Partnership free trade agreement that the Obama administration had signed in 2016, but not yet ratified, America would have had open access to the Vietnam and Malaysia markets years ago.
Assuming Xi and Trump sign the deal their negotiators agreed, some of the trade tensions and frictions will ease, which would be positive for both their economies and the global trade environment. But Trump is unpredictable and petulant, as demonstrated by his additional 10 per cent tariff on Canada in response to an advertisement that simply reproduced snippets of Ronald Reagan’s compelling arguments against tariffs.
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China has, however, flexed its biggest trade muscle and the alacrity that Trump and his administration switched from talking tough to saying nice things about Xi and China showed just how powerful that dominance of rare earths is.
It will take years, if not decades, for the US to insulate itself against that threat.
Meanwhile, Xi can trump the American president’s threats of extreme tariff rates with something far more effective and less damaging to his own economy than Trump’s tariffs.
Exports of rare earths and rare earth magnets aren’t massive revenue generators, whereas tariffs represent a big increase in US domestic taxes, harm trade competitiveness and increase the inflation rate. They are damaging to the US economy and its citizens.
The leverage in these negotiations is, as the US seems to have belatedly realised, quite lopsided.
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