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Trade deal probably not before the US presidential elections

19. July 2019, 11:03 Uhr

It has been being a veritable rollercoaster ride so far: the state and prospects of the US-China trade talks. Frosty periods and even break-downs were followed by mutually ostentatious good-will, only to collapse again. These days are no different: After a restart of the talks at the G20 summit in Japan in June, Donald Trump has unnerved markets and businesses again by stating that he was in no hurry to cut a deal. So how likely is an agreement between the two economic superpowers, and when, if at all, might it happen?

According to our game-theoretical analysis, alas, the likelihood is rather slim, and the date of a possible agreement in the distant future anyway, for three reasons:

1) Trump’s incentives

Yes, Donald Trump would like to cut a deal presenting him with further proof of his superior business acumen. But there’s a snag, and that is timing. In order to work in favour of re-election prospects, that deal would have to come no later than this autumn so as to generate an economic boost in time for the November elections in 2020. By contrast, a deal early next year, say, would fail to yield visible macroeconomic effects while undermining the President’s credibility with the most visceral of his “America First” followers. In other words, if there’s no deal later this year, there won’t be one until late 2020 or even early 2021.

2) Beijing’s incentives

China is so obviously bent on cutting a deal that is has become a weakness. Whenever there was a restart of the talks, it was mainly down to Beijing rejigging its negotiation position (even if, provided Donald Trump’s accusation is accurate, the Chinese side was responsible for the talks’ breaking down in the first place). The problem is: The American President has realised that weakness and been capitalising on it to the extent that China now finds itself boxed in: Either it yields on the critical point of wholesale reform of its economic policy framework, or there will be no deal.

That bodes ill for the prospects of a deal in general and an early one in particular: Xi Jinping cannot give in to such a profound demand of systemic change without undermining his own, carefully nurtured power. Simultaneously, he has allowed state-led media to stir up a nationalistic tide in the population, crying to stand firm now in the face of American aggression. Particularly in terms of the Eastern cultural trait of “keeping face” as well as in terms of naked power politics, Xi has maximised his incentives never to yield to this specific demand by the US.

3) Structural impediments

The international political system is characterised by anarchy. In this system, mutually beneficial outcomes such as a Sino-American trade deal quickly becomes infeasible when both sides have created dominant incentives of facing the other down in a game of chicken. Donald Trump not only relishes this modus operandi: He seems quite simply unable to elude its gambling attraction. Without a neutral mediator, the risk that one or even both of the players miscalculate is extremely high – and, by the same token, the chances of a deal pretty low. The new age of protectionism is not going to fade soon.

 

[Photo by: The White House, Public Domain]