But a closer look at each step shows that nothing was preordained.


One point, clear in retrospect, is that Japan overcompensated for the slowdown in exports.


Within 18 months of the Plaza accord, it had cut benchmark interest rates from 5% to 2.5%.


It also announced a big stimulus package—increasing spending and cutting taxes—in May 1987, though by then its recovery was already under way.


It did not shift gears and raise rates again until 1989, when its asset bubbles were already a few years old.


As the International Monetary Fund has argued, there were at least two other factors that could have led to a different outcome.


Excessive stimulus, by itself, did not guarantee that Japan would suffer an asset bubble.


It was that much more dangerous when combined with financial deregulation, which led banks to lend more to property developers and homebuyers.


And the bursting of the bubble did not guarantee that Japan would suffer a lost decade, let alone three.


A sluggish response by regulators compounded the trouble.


Rather than pushing banks to raise capital, they encouraged them to go on lending to zombie firms.


So the simplistic story—that the Plaza accord felled Japan—misses the mark.


Rather, China should draw two lessons from Japan’s experience of trade tensions with America.


First, it must get its domestic-policy response right.


Japan feared that the deal with America would cause its growth to suffer; China fears the same about the absence of a deal.


But the bigger dangers for Japan were over-stimulus and flawed regulation.


So far it has been cautious about pumping up growth.


The real test will come if the trade war continues to escalate.


Ask the bellboy
A second lesson is the danger of resisting America’s demands, just because it is America that is making them.


Had Japan acted on some of America’s long-standing gripes, it might have fared better in the 1990s.


Domestic competition would have been stronger.


A bigger role for foreign investors might have prompted Japanese banks to tackle their festering problems.


Similarly, it is China, not America, that would be the biggest beneficiary if it moves more quickly to open its economy to foreign firms.


China might also note a historical curiosity.


The talks in 1985 were in New York’s Plaza Hotel, which was bought three years later by a property tycoon named Donald Trump.


At the time he said he had “knowingly made a deal which was not economic”, because the hotel was a masterpiece, not just a building.


Sure enough, in 1992 the Plaza Hotel entered bankruptcy.


That Mr Trump ended up harming himself might be comforting for China.


That he went ahead despite knowing the risks should be less so.


|WASHINGTON, DC

Finance & economics | Bully for you
President Donald Trump is trashing deals in favour of tariffs
That may backfire on America

NEW FRONTS in President Donald Trump’s assault on the global trading system are opening up by the day.


On May 30th he dropped a bombshell on Mexico, threatening a 5% tariff on all its exports to America, rising to 25% by October if immigration flows do not fall (see article).


On May 31st he turned to India, announcing the end of longstanding trade preferences on around $6bn-worth of its exports to America.


A proposal is being considered to enable the administration to increase tariffs on imports from countries deemed to be manipulating their currencies.


The appointment of judges to the court of appeals of the World Trade Organisation (WTO) is being blocked.


Japan and the European Union are on notice that America may impose tariffs on their cars.


Meanwhile the biggest trade fight of all, with China, is getting bloodier.


The trade element of Trumponomics is a striking departure from previous administrations’ policies, and a stiff challenge to the multilateral trading system.


But critics must face some uncomfortable truths.


The first is that some of America’s frustrations with its trading partners are justified.


China’s system of subsidies and state-directed capitalism harms competing firms elsewhere, and raises questions about surveillance and security.


India’s protectionism has long been an obstacle to trade liberalisation.


And the WTO’s dispute-settlement system has serious weaknesses.


Moreover, America has the strength to force others to comply with many of its demands.


Although its share of the world economy (measured at market prices) has fallen from 38% in 1969 to 24% this year, it is still the world’s most important commercial market.


When previous tariffs on Mexican and Canadian steel and aluminium were removed, trade between the three North American countries was still more restricted than before.


But Mexicans and Canadians celebrated their loss as a win, since it could have been much worse.


Mr Trump may even succeed in creating some manufacturing jobs in America, as companies respond to the risk of new tariffs by deciding to serve a greater share of the domestic market from within.


Tariffs certainly seem to be spooking some into avoiding China.


Analysts at Bank of America Merrill Lynch report that companies are increasingly sourcing from elsewhere, and “localising”—that is, increasing production capacity in markets where they sell.


Finally, low tariffs are unlikely on their own to derail the affected economies.


Currencies and commodity prices fluctuate all the time, says Paul Bracher of Frost Bank, a Texas-based supplier of trade finance, and though a 5% tariff would crimp his customers’ profits, as margin compressions go it would be “not that big”.


But a 25% tariff would be a “game-changer”, he says, as few companies could adjust fast enough to avoid them.


The Mexican government would retaliate, and business confidence in America would suffer.


(On June 4th Jerome Powell, the Federal Reserve’s chairman, hinted that it would cut interest rates if necessary.


) Economists at Citibank calculate that 25% tariffs could cause Mexico’s GDP to contract by 4.6% if prices and exchange rates do not adjust, or crush the value of the peso by 59% if they do.


These figures were not intended as predictions, but to make the point that “the consequences of this policy could be so extreme we see it as unlikely to happen”.


Chinese officials are drawing up a list of “unreliable entities”, which could mean sanctions for American companies complying with their government’s ban on sales to Huawei, a Chinese telecommunications company.


Erin Ennis of the US-China Business Council, a lobby group, worries that America is pushing past the point at which China will be persuaded to change its policies.


Mr Trump’s tariffs may well result in the Chinese government increasing subsidies, she says, in order to speed up the development of domestic goods and services that can replace foreign ones.


Indeed, Mr Trump may even have pushed his own party too far.


America’s constitution says that trade policy falls to Congress, though over time Congress has delegated certain powers to the president.


He has tested the limits of that delegation, for example by claiming national security as justification for tariffs on imported steel and aluminium.


But the latest threat of tariffs on Mexican imports requires him to declare a state of national emergency, which Congress has the power to override.


John Murphy of the US Chamber of Commerce, a business group, says that “the Chamber is examining all legal options”.


In its admirers’ telling, Trumponomics is muscular pragmatism.


Regarding China, they say that earlier efforts failed and multilateral approaches are timid or naive.


If you believe that trade weakens economies and steals jobs, it all makes sense.


But it also sits ill with Mr Trump’s glee when he actually agrees to a trade deal.


Last November he signed one with Mexico and Canada, the USMCA, and boasted of making progress in talks with China.


The president can be a dealmaker, or, in his own phrase, a “tariff man”.


|GANZHOU

China | Magnetic attraction
Rare earths give China leverage in the trade war, at a cost
If China cuts off exports, it would hurt America but also undermine its own long-term economic goals

IT LOOKS AT first like a classic Chinese painting: water-soaked paddies nestled against endless green hills.


Ganzhou, until a few years ago, was southern China’s mining country.


The damage done in the name of economic growth involves an industry that has given China leverage in its trade war with America.


The rocks extracted are rich in rare-earth minerals, used in everything from planes to smartphones.


It is a dirty business that China dominates.


Rare earths, covering 17 elements on the periodic table, are in fact common.


But China holds two-fifths of global reserves.


In 1992 Deng Xiaoping quipped that “the Middle East has oil, China has rare earths.


” The chemicals used to extract them from the ore create toxic run-off, and for years China was more willing to bear that cost than other countries.


By the early 2000s it accounted for almost all the world’s production.


“There were no laws back then and everyone here was digging up the ground,” says Xie Yizhen, a local who worked in mining for 18 years.


Crucially, China has translated its control of the raw materials into dominance of the valuable next steps: turning oxides into metals and metals into products.


To extend Mr Deng’s comparison, it is as if the Middle East not only sat on most of the world’s oil but also, almost exclusively, refined it and then made products out of it.


This is why rare earths now figure in the trade war.


America can hobble Chinese tech giants by stopping American firms from selling them components such as semiconductors.


But China could, in return, cut off their supplies of rare-earth products.


The most important of these are specialised magnets for motors in electric vehicles, generators in wind turbines and missile-guidance systems.


China produces more than 90% of the world’s output, according to Citigroup, a bank.


Even the Pentagon, through its suppliers, is a client.


China’s rare-earth power is not a new worry.


In 2010 it restricted exports—in order, it said, to protect its environment.


The World Trade Organisation ruled against the restrictions after America and others challenged them.


But since then many countries have fretted about relying on China.


So it is no surprise that in the past few weeks China has brandished rare earths as a possible weapon.


“China gears up to use rare-earth advantage” ran a headline in Global Times, a nationalist tabloid, on June 9th.


After the scare in 2010 Japan lent money to Lynas, an Australian mining company with a refinery in Malaysia.


Today, it can meet nearly a third of Japanese demand for rare earths.


The Mountain Pass mine in California, which once supplied most of the world’s rare earths but which shut in the early 2000s, has reopened.


And on June 11th America said it would help other countries to develop their reserves.


China’s share of global rare-earth production fell from more than 95% in 2010 to 70% last year, and is likely to dip lower (see chart).


China has much more leverage in downstream products.


America last year bought about $250m of rare-earth magnets from China, and there are no easy alternative sources.


“These magnets are the farthest thing from a commodity that we can imagine,” says Ryan Castilloux, of Adamas Intelligence, a rare-earths consultancy.


And, says Mr Castilloux, the industry is small enough for China to be able to spot any American attempts to skirt a Chinese ban by importing magnets through other countries.


The Pentagon would probably be able to cope.


An industry joke has it that it can carry its annual supply of heavy rare earths (the kind used in its missiles) in a single suitcase.


David Merriman of Roskill, a metals research firm, says it would disrupt the supply chain enough to put American car companies “at a competitive disadvantage”.


But it is far from certain that China will block exports to America.


Doing so would also hurt Chinese companies, which are often the ones that build the motors and batteries for American customers using rare-earth magnets.


Longer term, a ban would encourage the same process that happened in mining.


Foreign firms, perhaps with government support, will invest in facilities to make finished products.


That would set back China’s grand strategy for rare earths, seen in the hills around Ganzhou.


Over the past few years it has shut scores of unlicensed mines.


At a huge cost, it is trying to clean up local rivers.


The big state-owned mining firm in the area has started filling in some of its pits with grass and shrubs.


China is still excavating plenty of rare-earth elements, especially in the north, but it has decided that it can buy much of what it needs abroad, and spare its own environment.


Last year, it became a net importer of rare-earth concentrate.


Instead, China has shifted its focus to rare-earth products, to increase its downstream advantage.


In an industrial park on the edge of Ganzhou, the government is ploughing money into factories that make rare-earth magnets and alloys.


This manufacturing is much cleaner than the mining, and captures more value.


Tellingly, when Xi Jinping, China’s president, visited the city last month, news reports showed him at JL MAG, a magnet company, not a mine.


At another company in Ganzhou, a manager shows off several of its products: little disc magnets, each containing about 30% rare earths.


When the magnets are smaller than a fingernail, it is hard to pull them apart.


When they are slightly bigger, just wider than a thumb, it is impossible to do so.


That is a good metaphor for what China ultimately wants from rare earths, and for its economy more generally: to reach a size where no country, not even America, can pull away.


Cutting America off now would undercut that ambition.


China | Chaguan
A fly-on-the-wall account of what China tells American bigwigs
Despite the Communist Party’s bluster, its officials puzzle over American politics

ABIT LATE, China’s leaders are starting to accept that their trade war with President Donald Trump is only one element of a larger crisis in relations with America—and not the most dangerous one.


The leaders understand that their critics within America’s foreign-policy and national-security machine—meaning aides to Mr Trump, members of both parties in Congress and officers in the State Department, Pentagon, spy agencies and beyond—want China to change its ways.


They also believe (or hope) that Mr Trump wants something different, and perhaps less painful for them: to show voters the spectacle of China losing a trade fight with him.


China’s rulers now accept that they face more than a Trump problem.


They concede that bipartisan suspicion of China in America will intensify in the run-up to the elections of November 2020, and will continue afterwards, whoever wins.


They absorbed that message during visits by high-ranking Americans, including Mr Trump’s officials, business bosses and veterans of Republican and Democratic governments.


Dismayingly, they show no sign of accepting that China’s own actions are in any way to blame.


Chinese leaders believe that America’s policy machine wants them to change principles that have guided China’s rise for 20 years.


They protest that these demands cut to the heart of China’s model of development.


Such figures as the United States Trade Representative, Robert Lighthizer, have drawn up a charge sheet of Chinese norms and practices deemed intolerable now that China is so large, and so competitive in so many fields.


Mr Lighthizer has allies in Congress, from both parties.


They want China to abandon its model of state capitalism, with its subsidies for local champions, arm-twisting transfers of technology, curbs on market access and politicised regulation.


Mr Lighthizer has proposed enforcement and verification mechanisms that Chinese figures indignantly compare to the inspections that underpinned cold-war arms-control agreements.


No Chinese leader, it is said, could accept such a humiliation—any more than they will tolerate American moves to strangle Huawei, a telecommunications giant that is central to China’s plans to become a standard-setting tech superpower.


There is much Chinese grumbling about security hawks working for Mr Trump, from his national security adviser, John Bolton, to military commanders.


The hawks are accused of breaking understandings about support for Taiwan, the democratic island that China claims as its own.


The Chinese side thinks that Mr Trump was bullied by hawks into walking out on North Korea’s leader, Kim Jong Un, at their summit in Hanoi in February.


It is no accident that China’s president, Xi Jinping, decided to pay a state visit to North Korea, shortly before attending a G20 summit in Japan which Mr Trump will also join.


Chinese officials gasped when Mr Trump threatened to slap extra tariffs on China if Mr Xi did not agree to meet him on the G20’s sidelines.


Japan’s prime minister might swallow an American insult like that, growl Chinese sources, but not us.


By visiting Pyongyang first (he arrived on June 20th), Mr Xi reminded Mr Trump that China’s leader is an indispensable diplomatic actor, not a junior partner in a trade dispute.


Chinese policy types obsess over the idea that Team Trump is not engaged in a sincere negotiation, but is seeking to contain a rising China.


They complain about shifting American demands.


At first China was told that the problem was the trade balance, and offered to buy American goods.


Then economic rules and norms were called the crux of the dispute.


So China prepared to negotiate, drawing up a 150-page draft agreement.


Then, as the Chinese side tells it, Mr Xi realised that America’s plan amounted to an assault on Chinese sovereignty, rejected it and has since been cheered within his own system for his stand.


There is muttering, in contrast, about Mr Xi’s chief economic aide and trade envoy, Liu He.


Mr Liu, a deputy prime minister, is accused of lacking political sense.


Mr Trump is not a leader in thrall to principles.


That is why the Chinese side hopes, in essence, that he could accept a trade deal which breaks Mr Lighthizer’s heart, and a North Korean pact that leaves Mr Bolton miserable, as long as those deals bring him applause from voters.


Mr Xi, it is said, believes that Mr Trump does not want to decouple America’s economy from China’s—except in the production of some sensitive technology.


But Mr Xi does worry that America’s president could be hijacked by hardline advisers.


If no reasonable deal can be struck, Chinese hosts tell Americans, Mr Xi will wait for the election in November 2020 to produce a different president.


They express confidence that relief will come sooner, because Mr Trump needs votes from farm states hurt by the tariff wars, and is desperate to keep the stockmarket roaring.


Imperialists never change
Doubts lurk amid the bluster.


In public Chinese officials say that Mr Trump needs a deal to win in 2020.


In private they ask whether, perhaps, American voters might prefer to see him fight on.


They admit to bafflement over some of Mr Trump’s sallies, such as when he told Fox News that he could not accept a “50-50 deal” with China, but had to come out ahead.


To Chinese ears, that was fantastically unhelpful.


It recalled the “unequal treaties” imposed by 19th-century powers which every Chinese schoolchild is taught to hate.


Mr Trump has said that he will not let China become the world’s largest economy in his lifetime.


Does he mean these things, Chinese hosts ask, or is this all domestic politics?


To prepare Chinese public opinion for a long trade stand-off, propaganda chiefs have abandoned months of restraint and told state media to start thundering about American bullying.


Stoking nationalism is a familiar Chinese ploy.


As China reduces its own room for manoeuvre, it risks forcing Mr Trump to concede ground to China to secure a deal.


Meanwhile his chaotic style is straining China’s system to its limits.


The mood in Beijing is anxious, with reason.


|DELHI

Asia | A Harley-hating ally
India presents America with a choice between geopolitics and trade
So far, geopolitics is winning—just

MIKE POMPEO, America’s secretary of state, had two objectives during his trip to Delhi on June 25th.


The first was to affirm India’s importance to America, which envisages a grand Indo-Pacific alliance to counter China.


The second was to soothe an increasingly heated row about trade.


Achieving the first was easy enough, but the second is proving harder.


America and India have bickered about trade for years.


India’s average tariff is high, at around 13%.


Its bureaucrats are also keen on other barriers to trade, from obscure rules on packaging to prohibitive red-tape on the import of dairy products.


But over the past few years Narendra Modi, India’s prime minister, has further inflamed these irritations.


His government has increased tariffs on lots of American exports, including telecoms equipment, medical devices and nuts.


It has also expanded rules favouring locally made goods in public procurement and has proposed a new law demanding that tech firms store data about Indian customers within India.


And last year it abruptly announced rules on e-commerce that seemed to target two American firms, Amazon and Walmart, the latter through its purchase of Flipkart, a fast-growing local e-tailer.


The complaints of American trade negotiators about Indian protectionism, however, are typically drowned out by diplomats and soldiers, who see India as a natural and indispensable ally against China.


The two countries established a new high-level diplomatic dialogue last year and have increased their military co-operation.


America wants India to stop importing oil from Iran, which India recently and reluctantly agreed to do.


(Oil is the biggest contributor to India’s trade deficit and the Iranian oil comes at a discount to world prices.


) America also wants India to reverse plans to purchase Russian anti-aircraft missiles and telecoms equipment made by Huawei, a Chinese company—steps that India is resisting.


The Indian government seems to have been pleased by what it perceived to be American support in its recent stand-off with Pakistan.


In the days preceding Mr Pompeo’s visit, it announced a large order of long-range patrol planes made by Boeing—a gesture that was presumably intended in part to mollify Mr Pompeo’s boss, Donald Trump.


But even as the strategic co-operation between the two countries deepens, the row over trade is gathering strength, too.


India was one of the countries America hit with tariffs on steel and aluminium last year.


It is also the subject of several complaints America has made at the World Trade Organisation in the past year.


And on June 5th America evicted India from a scheme that offers tariff-free access to certain goods from poor countries as a spur to development.


India, Mr Trump complained, was not providing “equitable and reasonable access to its markets”, a condition of the scheme.


There are even mutterings in Washington about launching a formal investigation into India’s unfair trade practices—the same step that initiated America’s trade war with China.


Both sides would prefer to avoid a full-blown conflict.


Since 2002, when America’s ambassador to India called Indo-American trade and investment “as flat as a chapati”, it has grown rapidly (see chart), making America India’s biggest export market.


Moreover, India’s economy is slowing, which will presumably make the government even warier than it otherwise would be of a trade war.


Although India accounts for only a small fraction of America’s trade, there are plenty of big American firms that would lobby against tit-for-tat tariffs.


And hawkish American trade officials have their talons full at the moment.


The fact that it was Mr Pompeo who visited, rather than Robert Lighthizer, America’s top trade negotiator, suggests that the administration’s geopoliticians have the upper hand for now.


Yet both countries have leaders with protectionist instincts.


India also has a growing trade surplus with America—not something that will endear it to Mr Trump.


He has called India the “tariff king” and often cites its 50% duty on Harley-Davidson motorbikes as a textbook example of the unfair treatment of American exports.


Mr Pompeo and his Indian counterpart, Subrahmanyam Jaishankar, insist that the two countries will find a way to resolve their differences—but it is not up to them.


Leaders | Counter-flow
Financial links between China and America deepen, despite the trade war
The two superpowers are at each other’s necks, but also in each other’s pockets

TRADE WAR, tech war, new cold war or just plain decoupling: call it what you will, the confrontation between America and China has been bruising.


Even as they resume trade negotiations, they talk of blacklisting each other’s firms.


In the words of Henry Paulson, a former American treasury secretary, the danger is that an “economic iron curtain” will soon divide the world.


All the more remarkable, then, that one crucial sector—finance—is bucking the trend.


Financial links between China and the West have grown tighter since the trade war broke out.


For years Western insurance firms, asset managers and brokerages have been allowed to own only minority stakes in local firms.


Now China is giving foreign financial firms more leeway on the mainland.


Since mid-2018 they have been able to apply for 51% control.


On July 2nd Li Keqiang, China’s prime minister, said that financial firms would be allowed full control by 2020.


That is not the only sense in which financiers and trade negotiators exist in parallel universes.


China is also making it easier for foreigners to buy into its markets.


Since the start of 2018 they have ploughed $75bn into Chinese shares.


In the same period they have pulled $8bn out of all other big emerging markets.


In the next decade, Goldman Sachs estimates, $1trn will enter China’s bond market from abroad, putting it among the world’s top investment destinations (see article).


All this is possible because China has not stopped foreigners from cashing out, despite the strict capital controls it imposes on its own citizens.


As the rules have eased, stock and bond indices that investors mirror in their portfolios, such as MSCI’s equities benchmark, have added Chinese securities.


Helping Wall Street and the City of London do more business in China is not a popular cause there or in the West, but the implications for finance are profound.


Firms like Morgan Stanley, BlackRock and Schroders which have long dabbled on the mainland must now decide whether to go for it.


Some worry that they lack clout and connections.


Few insurers, for example, relish a brawl with China Life, a state-run behemoth with 1.7m sales agents.


Foreign banks’ assets in China have soared to $650bn, but still amount to less than 2% of the country’s total.


Nonetheless a few global firms have a good chance of building large Chinese businesses.


HSBC, a London-based firm with roots in Asia, already makes three-quarters of its profits from Hong Kong and China.


AIA, which was spun out of AIG, an American firm, is the leader among foreign life-insurers.


Western asset managers have long records and global expertise that local firms do not.


Over time, as Chinese savers seek to diversify, this could help them win market share.


Many Wall Street bosses have gone from Sinophiles to hawks in the past few years.


So, tactically, China has a chance to win brownie points with America’s business lobby.


That gain could be dwarfed by the benefits within the country itself.


Western firms will push up standards in its immature but giant capital markets, a priority if it is to allocate capital more efficiently and get more out of its savings.


And China needs foreign funding more than in the past—its current-account surplus has dropped from 10% of GDP in 2007 to less than 1% last year.


Without a steady flow of capital into the country, there could be a destabilising fall in the yuan.


Some political figures in the West argue that financial links with China count as a betrayal.


Steve Bannon, who was once President Donald Trump’s adviser, talks of removing Chinese companies from American stock exchanges.


Marco Rubio, a hawkish Republican senator, has accused MSCI of channelling American cash to the Chinese Communist Party by including state-owned companies in its benchmarks.


In fact closer financial links could have a beneficial effect, which is why longtime China-watchers like Mr Paulson back them so strongly.


When Chinese firms have foreign shareholders or underwriters, their calculations change.


They face tougher questions, as Alibaba, a Chinese e-commerce giant, is reminded on every earnings call.


None of this will suddenly transform China into a free market but it will encourage its firms to be more open, to respond to market signals and to respect intellectual property.


Chinese firms that use Western banks when they go abroad, as Huawei used HSBC, are less able to circumvent global rules on corruption and sanctions.


If America excludes China from the global financial system, China will eventually build an alternative to the dollar-based order that has dominated markets since 1945—which would then feed into a wider strategic rivalry.


For the time being, despite the hostilities over trade and tech, China welcomes foreign investors and firms.


There is more to be gained from building connections than cutting them off.


Leaders | History wars
A trade dispute between Japan and South Korea has Trumpian echoes
The global tech industry could be hostage to Asian history

TAKE JUST about any trade fight today, and President Donald Trump’s America is at the centre of it: with Europe over cars and aeroplanes; with foreign producers of steel; with China over, well, everything.


But a brawl now under way in Asia, between Japan and South Korea, has the potential to be as damaging as much of what Mr Trump has stirred up.


It is also a sign that his model of abusing economic partners is spreading.


Tensions between Japan and South Korea go back centuries.


Japan’s colonisation of Korea between 1910 and 1945 is still resented.


Japan believes a 1965 agreement resolved claims by South Korea over forced labour.


It is incensed that South Korea’s supreme court last year ordered Japanese firms to compensate victims (see Banyan).


Amid a widening rift, Japan took its most serious action on July 4th when it began restricting exports to South Korea of three specialised chemicals used to make semiconductors and smartphones.


Japan accounts for as much as 90% of global production of these chemicals.


It exported nearly $400m-worth of them to South Korea last year.


That may not sound like much, but their importance is outsized.


They are needed to make memory chips, which are essential to all sorts of electronic devices.


And South Korean firms are the world’s dominant manufacturers of memory chips.


If Japan were to choke off exports, the pain would ripple through global tech supply chains.


Japan has also hinted that it might start requiring case-by-case licences for the sale to South Korea of some 850 products with military uses.


South Korean firms have called for boycotts of Japanese goods.


The two countries, whose trade relationship, worth over $80bn a year, is larger than that between France and Britain, need to step back from the brink.


Japan’s decision to limit exports is economically shortsighted, as it should know since it has itself been on the other side of such controls.


When China restricted exports of rare-earth minerals in 2011, Japan responded by investing in its own mines.


Already, the South Korean government is discussing plans to foster the domestic chemicals production.


Japan insists that South Korean companies will, once approved, still be able to buy its chemicals, but the threat of an embargo, once issued, cannot be easily dispelled.


The broader geopolitical context makes Japan’s self-harm even more reckless.


Regional supply chains are already under assault.


South Korean and Japanese companies are scrambling to find alternatives to China as a manufacturing base to avoid American tariffs.


Mr Trump has threatened both countries with import duties on their cars.


Ultimately, it is up to South Korea and Japan to repair relations.


But America’s waning interest in diplomacy does not help.


And Mr Trump is normalising the use of trade weapons in political spats.


His tactics teach others how to find an excuse for these actions: by citing national security.


Japanese media have suggested that South Korea has allowed the shipment of sensitive chemicals to North Korea, a far-fetched claim but one that could feature in a defence of its export restrictions.


Under a different president, America would be doing more to bind together Japan and South Korea, two indispensable allies.


Barack Obama pushed the Trans-Pacific Partnership that included Japan, and that South Korea was expected to join eventually.


One of Mr Trump’s first acts was to ditch that deal.


It is not too late to defuse the situation.


The commercial damage has been limited so far.


Japan is aware that, notwithstanding America’s current tactics, export controls look bad; it is thus susceptible to pressure from other trading partners.


The two countries will discuss their disagreement at the World Trade Organisation later this month.


This is shaping up to be a test of whether the global trading system can, despite great strains, still soothe tensions—or whether it is being supplanted by a new, meaner order, in which supply chains are weaponised and commerce is purely an extension of politics.


Finance & economics | US-China trade
More American tariffs on Chinese imports are coming
The trade war just got harder to end

PRESIDENT DONALD TRUMP sounded remarkably positive about the latest round of US-China trade talks, which ended on July 31st.


He called them “constructive” and said that the two countries’ shared future would be “a very bright one”.


The previous day the White House had confirmed a Chinese commitment to buy more American agricultural products—one of the ways in which China had hoped to mollify Mr Trump, who resents China’s large bilateral trade surplus.


From September 1st, he said, his administration would be applying tariffs of 10% on $300bn worth of Chinese imports, on top of the 25% tariff already in place on $250bn worth.


That means tariffs will soon cover almost all trade in goods between China and America.


The announcement seemed to come as a shock to many.


The S&P 500 index of leading American shares dipped.


Interest rates on American government debt fell, generally a sign of investors seeking a safe haven in expectation of economic turbulence.


But the Trump administration could argue that it had given plenty of warning.


Mr Trump’s announcement simply made concrete an earlier, vaguer threat.


Due process had been followed, including seven days of hearings in June on the proposed tariffs held by the United States Trade Representative (USTR).


During those hearings the USTR heard plenty of protest at the prospect of further tariffs.


Steve Lang, the president of the American Bridal and Prom Industry Association, a lobby group representing makers of wedding gowns and tuxedos, reported that his firm was already paying millions of dollars in tariffs.


(America has hefty levies on imported clothing quite apart from China-specific measures.


) The proposed new tariff would cost him at least $5m, he said.


Since his bank had already said it would not lend him the money to pay, his company would have to declare bankruptcy.


Such stories confirm that the new tariffs will hurt Americans, though it is not yet clear exactly how much, nor who will suffer most.


Exporters might cut their prices to absorb some of the tariffs themselves—though academic studies of earlier tariffs, in 2018, found no evidence of that happening.


The most recent round came into force only in mid-June, so there has been too little time for them to filter through to prices.


Some companies may have stockpiled goods to avoid the duties (at the cost of extra storage space and loans).


But there is good reason to think that the new round will hurt more than earlier ones.


Most of the imports from China previously affected were components, meaning that their higher prices affected only part of an item’s eventual cost.


The next tranche will feature end-products, such as clothing and consumer electronics.


Mr Trump has placed the blame squarely on the Chinese, whom he accused of renegotiating a deal they had already struck; of failing to keep promises to buy more American agricultural products; and of allowing fentanyl, a deadly drug, to reach America.


But his own actions have also made a deal harder to reach.


The Chinese have made it clear that to be acceptable, any agreement will have to reverse all the tariffs already applied.


And Mr Trump’s latest move is humiliating to China’s negotiating team, points out Bill Bishop, the author of Sinocism, a newsletter about China.


Trust between the two sides was fraying before.


Both sides now seem to be digging in for a prolonged conflict.


China’s government is reportedly touring the provinces to examine the resilience of the economy.


And in America the departments of defence and commerce, as well as the USTR, are warning companies about the risks their China operations might pose to national security.


The latest escalation will strengthen the view that China is not the best base from which to serve the American market.


And it is becoming ever clearer that America will insist that any deal must involve the threat of tariffs to force China to stick to its side.


Executives should understand that, with or without a deal, tariff risks will continue.


Mr Trump could lift all his tariffs tomorrow, if he wished.


But their effects will not be erased so easily.


Leaders | US-China trade
Dangerous miscalculations
America cannot have a strong economy, a trade war and a weak dollar at the same time

SINCE THE trade war began in 2018 the damage done to the global economy has been surprisingly slight.


America has grown healthily and the rest of the world has muddled along.


But this week the picture darkened as the confrontation between America and China escalated, with more tariffs threatened and a bitter row erupting over China’s exchange rate.


Investors fear the dispute will trigger a recession, and there are ominous signs in the markets—share prices fell and government-bond yields sank to near-record lows.


To avoid a downturn, both sides need to compromise.


But for that to happen President Donald Trump and his advisers must rethink their strategy.


If the realisation has not dawned yet, it soon should: America cannot have a cheap currency, a trade conflict and a thriving economy.


The latest spike in tensions began on August 1st, when the White House threatened to impose a further round of duties on $300bn of Chinese exports by the start of September.


China responded four days later by telling its state-run companies to stop buying American agricultural goods.


On the same day it let its heavily managed currency pass through a rate of seven against the dollar, a threshold which may seem arbitrary but is symbolically important (see article).


That lit a fuse beneath the Oval Office.


Mr Trump has long claimed that other countries, including China, keep their currencies artificially cheap to boost their exports, hurting America.


He has been griping about the strong dollar for months.


In June he accused Mario Draghi, the head of the European Central Bank, of unfairly weakening the euro by hinting at rate cuts.


Hours after the yuan dropped, America’s Treasury designated China a “currency manipulator” and promised to eliminate its “unfair competitive advantage”.


As the hostilities rose, markets swooned, with ten-year bond yields in America reaching 1.71%, as investors judged that the Federal Reserve will slash interest rates to try to keep the expansion alive (see article).


There is no denying that China has manipulated its exchange rate in the past.


But today a different dynamic is playing out around the world.


Mr Trump wants a booming economy, protected by tariffs and boosted by a cheap dollar, and when he doesn’t get them he lashes out.


But economic reality makes these three objectives hard to reconcile.


Tariffs hurt foreign exporters and dampen growth beyond America’s borders; weaker growth in turn leads to weaker currencies, as business becomes cautious and central banks ease policy in response.


The effect is particularly pronounced when America is growing faster than other rich countries, as it has recently.


The dollar’s enduring strength is a result, in part, of Mr Trump’s policies, not of a global conspiracy.


Unless this fact sinks in soon, real harm will be done to the global economy.


Faced with the uncertainty created by a vicious superpower brawl, firms in America and elsewhere are cutting investment, hurting growth further.


Lower interest rates are making Europe’s rickety banks even more fragile.


China could face a destabilising flood of money trying to leave its borders, as happened in 2015.


And further escalation is possible as both sides reach for economic weapons that were considered unthinkable a few years ago.


America could intervene to weaken the dollar, undermining its reputation for unfettered capital markets.


China or America could impose sanctions on more of each other’s multinational firms, in the same way that America has blacklisted Huawei, or suspend the licences of banks that operate in both countries, causing havoc.


As it pursues an ever more reckless trade confrontation, the White House may imagine that the Federal Reserve can ride to the rescue by cutting rates again.


But that misunderstands the depth of unease now felt in factories, boardrooms and trading floors around the world.


In September talks between America and China are set to resume.


The world economy cannot stand much more of this.


|WASHINGTON, DC

Finance & economics | Under attack
The trade war is leading some firms to crimp investment
Much depends on whether hostilities between America and China intensify

“THERE’S TARIFFS on games and tariffs on toys—try explaining tariffs to your little boy.


Santa’s workshop is struggling, you’ll find yourself saying.


I think the reindeer are backed up with their sleighing.


” Wendy Lazar, who runs a company called I Heart Guts, submitted this peeved poem to the United States Trade Representative (USTR) in June.


As an importer of children’s toys from China, she was complaining about how the trade war could squeeze her firm.


In boardrooms across America, business people are scrambling to assess the impact of the latest escalation in the commercial confrontation between the two superpowers.


For most firms the easy bit is calculating the immediate financial impact of more tariffs on demand, prices and costs.


Far harder is working out how to rejig your strategy and long-term investment plans to adapt to a new world of enduring trade tensions.


Fund managers and Wall Street traders have begun to reach their own conclusion—that investment may slump, possibly triggering a recession.


Hence the violent moves in markets since the first week of August, with a rush towards safe bonds and a sell-off in equities (see article).


That sell-off picked up pace on August 1st when President Donald Trump’s administration announced the imposition of tariffs on $300bn of Chinese goods, at a rate of 10%, starting on September 1st.


On August 13th the USTR announced a delay covering about two-thirds of the goods in question, including mobile phones, smartwatches and toys, which would be subject to duties starting on December 15th.


As Mr Trump explained later that day, the move would allow American shoppers to splurge in the run-up to Christmas.


The press release announcing the delay arrived at 9.43am; between 9.40 and 9.45 shares in Apple rose by 3%, and the S&P 500 share index jumped by 1%.


But by the following day the stockmarket—and the iPhone-maker’s share price—slumped again as investors fretted that a global downturn might soon be on the cards.


America’s expansion may be cooling as it enters its second decade, but GDP still grew at a respectable pace of 2.1% in the second quarter of 2019, and the unemployment rate is a brag-worthy 3.7%.


The direct effect of the tariffs should be small: in 2017, before hostilities began, goods trade with China amounted to just 3.2% of GDP.


Even including the additional levies planned for December, they represent a tax rise offsetting only a fifth of the cuts introduced by the Tax Cuts and Jobs Act of 2017.


What really matters, though, is the wider effects of the uncertainty created by the trade war on corporate behaviour.


Most companies make plans over a five- to ten-year horizon and invest in assets with a life of 10-20 years.


But with each new tariff announcement, the rules for trading their products become less stable.


And the scope of the trade war has expanded beyond goods to technology and currencies.


Perhaps the international banking system, shipping companies or foreign joint ventures could be next.


The most sophisticated firms try to gauge such risks.


The high level of uncertainty is measurable.


A study from 2016 by Scott Baker of Northwestern University, Nick Bloom of Stanford University and Steven Davis of the University of Chicago quantified policy uncertainty in America using newspaper reports.


Their index of trade-policy uncertainty has soared in recent months (see chart).


And such increases in uncertainty tend to have real effects.


The researchers found that increases in their index were associated with dampened investment and slower hiring.


More recently, Ryan Sweet of Moody’s Analytics, a financial firm, finds that changes in business confidence and economic-policy uncertainty appear to predict changes in managers’ capital spending.


Given all this, how is investment in America holding up?


In the second quarter non-residential business investment shrank at an annualised rate of 0.6%.


The question is to what extent the trade war is the culprit, rather than industry-specific factors, domestic economic trends or the global manufacturing cycle.


To get a sense of this The Economist has analysed around 2,400 listed American companies in 42 sectors, taking into account both their investment levels and how dependent their sector is on Chinese inputs.


Firms with a higher degree of Sino-reliance do seem to have scaled back investment.


The 20 sectors most exposed to inputs from China accounted for a third of total investment by the 2,400 firms.


In total these sectors saw aggregate capital spending drop by 1% in the past four quarters compared with the prior year.


Meanwhile the other 22 sectors, which are less exposed to China, saw investment rise by 14%.


The analysis is simple: other factors may well have played a role.


But business executives too report an effect on investment.


A survey compiled by the Federal Reserve Bank of Atlanta in January found that trade tensions had crimped investment by 1.2%.


Tariffs were mentioned in a quarter of all earnings calls among companies in the S&P 500 index in the second quarter of 2019, according to figures from FactSet, a data-analytics firm.


One of the sectors most exposed to China is chemicals.


In July Jim Fitterling, chief executive of Dow, a big producer, told investors on an earnings call that he would keep capital spending “tight” until he got “better visibility”, adding that he thought a trade deal was needed to “get some confidence back in this market”.


Wall Street economists are also crunching data on how trade-policy uncertainty is altering companies’ behaviour.


In June researchers at Goldman Sachs had been sceptical that the trade war was hampering investment, pointing out that overall policy uncertainty was low.


But more recently they have altered their view, finding that, after adjusting for underlying trends, sectors that sell more to China (rather than those that buy from it) were seeing slower investment growth than those that were less exposed.


Goldman’s economists also found that tariff announcements were associated with worsening financial conditions (higher borrowing costs, lower equity prices or a stronger dollar).


Expectations of interest-rate cuts by the Federal Reserve have only offset half of the shift in financial conditions.


Overall the analysts reckon that, including indirect effects, the hit to GDP would be 0.6%—material, but not enough to tip America into recession.


The overall picture, therefore, is that there is now good evidence that the trade war is leading some firms to crimp investment.


Pessimists worry that the knock-on effect from this capital-spending stumble could be far-reaching and more painful than the likes of Goldman expect.


In the long run it could sap productivity.


In the short run it could cause firms to scale back hiring.


That could then damage consumers’ confidence.


Much depends on whether hostilities between America and China intensify.


On August 13th Mr Trump said that he had a “very, very productive call” with China’s leaders.


But few on the ground take seriously the prospect of a lasting reconciliation.


Jake Parker of the US-China Business Council, a lobby group, reports that his members have realised that the threat of future levies would still lurk even if a deal were struck and tariffs lifted.


Blows to China’s economy could also spill back to America.


And Mr Trump has plenty more ways of injecting fear into the economy.


He must decide whether to reinstate onerous restrictions on American companies that do business with Huawei, a Chinese telecommunications giant, by August 19th.


His labelling of China as a currency manipulator could ignite a currency war.


If the sickness that is now visible in most trade-exposed sectors spills over to the rest of the economy, that would set off a downward spiral that not even lifting tariffs, and allowing in Ms Lazar’s stuffed toys, would reverse.


|SHANGHAI

Finance & economics | The other inversion
China is calm as growth slows.


Though the trade war is hurting, officials are reluctant to unleash stimulus

HALF A DECADE ago, if you had asked economists which number—five or seven—described China’s GDP and which its currency, most would have answered this way: growth will remain strong at around 7% annually, and the currency will strengthen until it takes just five yuan and change to buy a dollar.


One measure of the impact of Donald Trump’s trade war on China is the inversion of these digits.


As American tariffs bite, economic forecasters think that Chinese growth next year will slow to five-point-something percent.


The yuan, for its part, has slumped to more than seven per dollar.


Mr Trump has crowed about the success of his tactics.


“China has taken a very hard hit,” he said on August 26th at a news conference after the G7 summit in France.


” But a more accurate reading of China’s policy stance is one of surprising calm in the face of the economic slowdown and, by extension, of stiffer resolve in the trade dispute.


The toll of tariffs on China’s economy is becoming more visible.


Although exports to America account for just a small share of overall GDP, the uncertainty has bruised corporate confidence.


Investment spending is on track to increase this year at its weakest pace in at least two decades.


Factory prices have veered into deflation, a bad sign for industrial profits.


Economists at Morgan Stanley, a bank, now forecast that Chinese growth will fall to 5.8% next year; previously they had expected 6.3%.


(This forecast is conditional on the new American tariffs being implemented and lasting for four to six months.


If not, the bank expects growth of 6% in 2020.


)

In the past, whenever growth looked set to slow sharply, Chinese companies could count on a stimulus package to revive it.


But this time officials have been much more restrained in their response, partly because of concern about adding to China’s hefty debt burden.


On August 26th the central bank had a chance to lower funding costs for banks, but it refrained, bucking the global trend towards lower rates.


On August 27th the State Council, or cabinet, issued an underwhelming 20-point plan to promote consumption.


Some analysts had been hoping for targeted tax cuts or subsidies; instead, it made small-bore promises, such as more 24-hour convenience stores.


The Chinese government’s lack of panic about the economic outlook should give Mr Trump pause.


“Its leadership now looks committed to a strategy of toughing out trade tensions,” says Andrew Batson of Gavekal, a research firm.


It helps that China has procured insurance in letting its exchange rate decline to 7.1 yuan per dollar, the weakest since 2008, offsetting some of the drag from tariffs.


But some think the calm is verging on complacency.


Not only has China’s government refrained from stimulus, but it has become more hawkish about the property sector, the engine of its economy.


In line with President Xi Jinping’s oft-repeated warning that investors should not speculate on housing, regulators have curtailed lending to developers and sworn off cutting mortgage rates.


“We would view stabilising growth by choking credit to the property sector as analogous to performing cardiac surgery without blood pumps, oxygen and anaesthesia,” says Lu Ting, an economist with Nomura, a bank.


|WASHINGTON, DC

Finance & economics | Plane clash
America is preparing to hit $7.5bn-worth of European imports with tariffs
The trade dispute will not end there

MOST MUSEUM exhibits are beautiful—or at least old.


But an exhibition in 2015 at the World Trade Organisation (WTO) included 60 cardboard boxes of documents.


The point was to give a sense of the scale of two of the body’s longest and largest legal disputes, over American and European subsidies for aircraft manufacturers.


Now the fight is moving out of the paperwork phase.


On October 2nd the WTO published its decision to allow the Trump administration to put tariffs on $7.5bn-worth of imports from the European Union.


That is intended to match the harm done to Boeing, an American manufacturer, by the EU’s subsidies for Airbus, Boeing’s European rival.


It is the largest retaliation the WTO has ever approved.


Senior officials at the United States Trade Representative (USTR) called the victory “historic”.


In October 2004 America complained to the trade body about loans offered by EU governments to Airbus on easy terms.


The following June the EU filed a complaint about the harm to Airbus from subsidies to Boeing, in the form of tax breaks and generous contracts with the Department of Defence.


Since then there has been enough legal back-and-forth to bore the most ardent plane-spotter.


Each made some adjustments supposed to resolve the other’s complaints—but neither was satisfied.


The latest judgment comes as the EU’s claim of compliance is still being assessed.


In around eight months, the WTO is likely to authorise the EU to put tariffs on American imports, completing the tit for tat.


In a narrow sense, this is the multilateral rules-based trading system working as intended.


Both parties went through the proper channels to receive an official judgment.


Neither took matters into its own hands.


The tariffs America is about to impose on Europe are not unilateral bullying, but an enforcement mechanism of last resort.


They would probably have been applied by any president, even one less tariff-happy than Donald Trump.


In a broader sense, it shows how vulnerable those multilateral rules are to timewasters.


In a sector like aircraft manufacturing, where subsidies are ubiquitous, it has always been clear that America and the EU needed to agree to mutual disarmament.


Instead, they have talked past each other, each complaining at various points that the other was unwilling to negotiate.


Most recently it has been the EU that has submitted proposals to America, only to be rebuffed.


Meanwhile, the boxes have been piling up and the lawyers raking in fees.


The Trump administration wasted no time in starting the formalities at the WTO that will allow it to apply the tariffs.


That means the EU can expect tariffs on October 18th.


As well as tariffs of 10% on large aircraft and 25% on agricultural and industrial goods, the list the USTR published on October 2nd included Italian Parmesan, Scotch whisky and German waffles.


Even if a product is not on the list it may still be hit, as items could be shuffled in and out.


For all the fuss the dispute will generate among connoisseurs of European cheese, the biggest impact will be on aircraft, of which America imported $5.1bn-worth in 2018, mostly from France and Germany (the USTR has said that only a portion will be hit).


It could have been worse—the Americans could have applied a tariff of up to 100%—but even one of 10% will bite.


American airlines fear that tariffs will raise the price of Airbus aircraft, and that Boeing will lack the capacity to expand supply.


Perhaps the WTO will find that the EU has removed its subsidies, and the Americans will stand down.


Or in eight months’ time, when the WTO authorises the EU to place retaliatory tariffs on American imports as part of the Boeing dispute, the two sides might finally negotiate away their differences.


By then Mr Trump’s appetite for tariffs may have been sated, and he might abandon separate threats to put tariffs on European cars and car parts.


But it is also possible that trade disputes between the two sides become fiercer.


America is blocking the appointment of judges to the WTO’s court of appeals.


If either side makes a move that the other judges an infraction, and a complaint to the WTO cannot be heard for lack of judges, that could be the end of playing by the rules.


Finance & economics | Trade war
A mini-truce between America and China has investors feeling hopeful
But there remain plenty of reasons for pessimism

COULD IT be a ceasefire at last?


After months of rising tension and threats of ever higher tariffs, American and Chinese negotiators agreed to a mini-truce on October 11th.


In exchange for America holding off on a tariff increase planned for October 15th, the Chinese government offered to buy American agricultural products.


China also pledged to do more to liberalise its financial services sector, tighten up its intellectual property rules and be more transparent with its interventions in currency markets.


President Donald Trump described the talks as “a love fest”.


The details of the agreement are still unclear.


Chinese state media did not even describe it as a deal, instead saying that substantial progress had been made in talks.


Still, a ceasefire is better than higher tariffs and it might produce real gains.


More transparency for China’s opaque currency regime, for example, would not hurt.


The same day, in state-run media, China announced a timetable for liberalising the financial services sector, which should benefit the Chinese economy as well as foreign companies.


Yet the agreement, such as it is, seems more like a demonstration of goodwill than a resolution of the trade dispute.


America’s concession is minor: although a tariff increase from 25% to 30% on around $250bn of imports from China will no longer go ahead, other tariffs are still scheduled to rise on December 15th.


The Chinese government’s promise to purchase $40-50bn of agricultural products should help American farmers (assuming that the sales happen at a sufficiently high price).


But trade is supposed to be about markets, not state intervention; trade experts fear that a move towards “managed trade” will further undermine the global trading system.


China’s announced reforms to financial services are largely a restatement of old promises and may well not be implemented effectively.


Lifting restrictions on foreign ownership within finance, for example, is not much use if the government then uses other regulations to hinder American companies.


The big question for American businesses is whether this detente will hold.


Progress so far seems to have been achieved by negotiators compartmentalising their differences.


Mr Trump called the agreement “phase one” and added that the final deal would be so big that it would have to be completed sequentially.


When negotiators move on to China’s subsidies, state-owned enterprises or data policies, talks are likely to get trickier.


There are also live disputes that go beyond just trade.


Robert Lighthizer, the United States Trade Representative, said that the matter of Huawei, the Chinese telecommunications giant that faces restrictions on its ability to sell to American companies owing to security concerns, was not part of the current round of discussions.


On October 7th the Trump administration added 28 Chinese companies to its “entity list”, making it harder for them to do business with America, in response to the Chinese government’s human-rights abuses in the province of Xinjiang.


A Chinese spokesman labelled the move “a grave violation of basic norms governing international relations and a flagrant interference in China's internal affairs.


”
For now the atmosphere among the trade negotiators has clearly improved.


But truces have emerged before, only to collapse under a barrage of tweets.


Ominously the two sides offered neither a joint statement nor a formal text setting out the deal.


It is possible that, as in past rounds of talks, there are still misunderstandings that will only become apparent as the deal is formalised.


Over the coming weeks negotiators will try to hammer out the precise details.


Mr Trump will then meet Mr Xi in Chile during a meeting of the Asia-Pacific Economic Cooperation forum on November 13th and 14th, where he hopes to sign the text.


Even if the two leaders do put pen to paper, businesses will still face immense uncertainty and hefty tariffs.


|WASHINGTON, DC

Finance & economics | Spilling over
America and China are sparring over subsidies
They are chasing the wrong solutions

AS TRADE TALKS continue between America and China, old fights are rumbling on.


On October 28th China asked the World Trade Organisation (WTO) to allow it to retaliate against $2.4bn of imports from America, as part of a long-running dispute over American treatment of Chinese exports.


The final sum will be set by an arbitrator, and will be small in the broader context of the two countries’ escalating trade war.


The dispute concerns two of America’s biggest gripes: China’s economic model and the WTO’s inability to constrain it.


America accuses China’s government of bloating its private sector with subsidies, which spill over to affect businesses abroad.


If state-owned banks make cut-price loans, or state-owned electricity companies sell cheap energy, Chinese exporters have an unfair advantage, it says.


By last year America had imposed tariffs on almost 7% of Chinese imports, citing such subsidies and the need to defend itself.


Americans argue that if Chinese state institutions hold a majority stake in a company, this strongly suggests it is a “public body” and therefore capable of giving subsidies.


But the WTO’s appellate body has generally disagreed.


It has also often backed China’s stance that America’s defensive duties are too harsh.


The United States Trade Representative, America’s main trade negotiator, attacked the most recent such judgment, in July.


Such decisions, it said, illustrated its concerns with the way that the WTO resolves disputes.


In an attempt to force a change of approach, it is blocking appointments to the WTO’s appellate body.


But bringing the body to a standstill would do nothing to solve the rows that have brought America and China before it again and again.


That would require them to agree on what counts as a public body, and when defensive tariffs are allowable.


Even better would be a deal to limit subsidies, which might be added to the WTO’s rules.


Unfortunately American and Chinese negotiators, who are currently trying to strike a “phase one” deal that could bring a ceasefire in the broader trade war, are not even discussing these thorny issues.


Meanwhile American sanctions against Huawei, a Chinese telecoms firm, have amplified those voices within China that are calling for even more subsidies.


In the long run subsidies are hard to tackle bilaterally, since any benefits can be undone if an unconstrained third country boosts its handouts in response.


American officials have been discussing what new multilateral rules could look like with European and Japanese officials, but without much visible progress.


And even if the trio agreed on something, China might not play along.


On October 26th a forum that was supposed to address steel subsidies collapsed, in part because the Chinese withdrew.


|SHANGHAI AND WASHINGTON, DC

Finance & economics | Phase one, scene two
China tries to squeeze more out of a small trade deal with America
China wants to see American tariff cuts as a show of good faith

THE TRADE conflict between China and America has been a clash not just of giant economies but of utterly different public negotiating styles.


In one corner are President Donald Trump’s tweets, in which he veers between heaping praise on China and declaring that he has pummelled it.


In the other is a Chinese bureaucracy that has stuck doggedly to the same message: tariffs must be removed for the two countries to reach a trade agreement.


A mini-deal, hashed out last month, is shaping up to be a mini-test of their contrasting approaches.


The outline of the mini-deal—or, as Mr Trump put it, the “substantial phase-one deal”—seemed clear enough.


China would buy American agricultural products, and America would hold back from slapping yet more tariffs on China.


With this basic agreement under their belts, the two combatants would move onto weightier topics such as China’s support for its strategic industries.


But two problems have since emerged: one predictable, one not.


As was foreseeable at the time, the lack of detail about the mini-truce concealed big differences.


Mr Trump said that trade talks had been “a love fest”, and that China would buy $40bn-50bn in farm goods from America, more than double the level before the trade war.


But the more he gloated, the more China appears to have seen an opening to push for more.


According to multiple reports, Chinese negotiators have demanded that to complete the mini-deal, America must remove some of its existing tariffs, not just refrain from new ones.


On November 4th a Trump administration official reportedly said that a phase-one deal between America and China could roll back the 15% tariff imposed on September 1st, on $112bn of goods.


China could be offering some sweeteners such as a purchase of liquefied natural gas, which Wilbur Ross, America’s commerce secretary, hinted at on November 5th.


But the tariff reduction would be an American concession.


The previous stance of Robert Lighthizer, America’s chief trade negotiator, was that tariffs should remain until China proves that it is honouring whatever deal is struck.


The unpredictable complication was Chile’s big protests.


Mr Trump and Xi Jinping, his Chinese counterpart, had hoped to seal their mini-deal on neutral ground at a summit of Asia-Pacific countries in Chile in mid-November.


But the organisers have cancelled the summit.


That poses the question of where and when the leaders should meet, itself a matter of negotiation.


Given Mr Trump’s tendency to improvise, China wants to be sure there is a political win on the table before it agrees to meet.


The Chinese may yet include more juicy titbits for American businesses as part of the mini-deal.


But even if it is signed without a hitch, the trade war will be far from over.


Hundreds of billions of dollars of Chinese exports would still be affected by tariffs and companies would still have to live with the uncertainty of the old ones coming back.


Mr Trump would still have the final word, and another one after that too.


|WASHINGTON, DC

Finance & economics | Who shot the sheriff?


It’s the end of the World Trade Organisation as we know it
And America feels fine

“WINTER IS COMING,” warned a Norwegian representative on November 22nd, at a meeting of the World Trade Organisation (WTO).


The multilateral trading system that the WTO has overseen since 1995 is about to freeze up.


On December 10th two of the judges on its appellate body, which hears appeals in trade disputes and authorises sanctions against rule-breakers, will retire—and an American block on new appointments means they will not be replaced.


With just one judge remaining, it will no longer be able to hear new cases.


By one recent estimate, membership of the WTO or General Agreement on Tariffs and Trade (GATT), its predecessor, has boosted trade among members by 171%.


When iPhones move from China to America, or bottles of Scotch whisky from the European Union to India, it is the WTO’s rules that keep tariff and non-tariff barriers low and give companies the certainty they need to plan and invest.


The system is supposed to be self-reinforcing.


Mostly, countries follow the WTO’s rules.


But if one feels another has transgressed, then instead of starting a one-on-one trade spat it can file a formal dispute.


If the WTO’s ruling displeases either party, it can appeal.


The appellate body’s judgments pack a punch.


If the loser fails to bring its trade rules into compliance, the winner can impose tariffs up to the amount the judges think the rule-breaking cost it.


It is that punishment that deters rule breaking in the first place.


It is no surprise that President Donald Trump has axed these foreign arbiters, given his general distaste for internationally agreed rules.


On November 12th he declared himself “very tentative” on the WTO.


But the problems run far deeper than dislike of multilateral institutions.


They stem from a breakdown in trust over the way international law should work, and the more general failure of the WTO’s negotiating arm.


Had the Americans felt that they could negotiate away their grievances, resentment towards the appellate body might not have built up.


But with so many members reluctant to liberalise, including smaller countries fearful of opening up to China, that has been impossible.


America has had some wins at the WTO: against the European Union for subsidies to Airbus, an aircraft-maker; and against China for its domestic subsidies; theft of intellectual property; controls on the export of rare earths, which are used to make mobile phones; and even its tariffs on American chicken feet.


But it has also been dragged before the appellate body repeatedly, in particular by countries objecting to its heavy-handed use of “trade remedies”: tariffs supposed to defend its producers from unfair imports.


In such cases, it has generally sought to become compliant with the rules rather than buy the complainant off.


Though previous administrations had grumbled, and occasionally intervened in judges’ appointments, the Trump administration went further.


Its officials complained that disputes often dragged on much longer than the supposed maximum of 90 days, and—more seriously—that the appellate body made rulings that went beyond what WTO members had signed up to.


They made it clear that unless such concerns were dealt with, no new judges would be confirmed.


Judicial overreach is in the eye of the beholder.


Losers will always feel hard done by, and America has been quick to celebrate the WTO’s rulings when it wins.


But plenty of others think that the appellate body had overstepped its remit.


A recent survey of individuals engaged with the WTO, including national representatives, found that 58% agreed with that verdict.


Getting so many countries to sign up to the WTO was a remarkable achievement.


One way negotiators managed this was by leaving the rules vague, and papering over their differences with ambiguous language.


Take “zeroing”, for example: using dubious mathematics to calculate defensive tariffs on unfairly traded imports.


The Americans claim that the rules do not say they cannot do it.


But others counter that the rules do not say they can.


It is such long-running differences that have set the scene for the latest showdown.


The American trade lawyers happy to kill the appellate body see a fundamental difference between their attitude to international law, and that of Europeans.


Their position is that only clear contractual terms can be enforced, and they see Europeans as more comfortable with resolving ambiguities by going beyond what is written.


Essentially, they regard the appellate body as too European.


Moreover, in its eagerness to rule where terms are unclear, and in the American government’s willingness to change its laws in response, they feel an affront to America’s sovereignty.


Under the GATT, which lacked a proper enforcement system, ambiguities were hashed out in smoke-filled rooms.


But the WTO was supposed to make naked power politics over trade obsolete.


Had it worked as intended, there would have been a balance between settling disputes and writing new rules.


Policy is best made with a vibrant judiciary interpreting the law, and a functioning legislative arm to fix any mistakes.


Whenever the appellate body made decisions that annoyed members, they could have resolved their differences at the negotiating table.


Perhaps America could have got others to agree to higher tariffs on imported steel, or been granted some flexibility in its defensive duties.


But the WTO’s negotiating arm has been broken for years.


With the current count of members at 164, it has become more inclusive, but is unable to get much agreed.


Each member has a veto over any further multilateral trade liberalisation.


And without new negotiations, resentment towards the appellate body has built up.


Had the multilateral system been more effective at dealing with the rise of China, perhaps the single biggest issue of its times, then calls to save it might be louder in Washington.


Although various American administrations pursued and won several cases, the process was slow and occasionally frustrating.


America can justly claim that, when it tried to hold China to account for its breaches of trade rules, it got little support.


America has been responsible for more than half of all complaints against China.


And other WTO members’ complaints were generally copycat, filed in America’s wake.


Now that the Trump administration has bypassed the WTO and taken the fight straight to China, there is nothing remaining that it particularly wants from the WTO.


And so the chances that it will relent and allow nominations to the appellate body by December 10th are slim to none.


In response to proposals from other members to change the body’s rules, an American representative said that they were not persuaded that the rules would be stuck to.


On November 26th the Trump administration suggested slashing the pay of members of the appellate body.


In October Chuck Grassley and Ron Wyden, the top Republican and Democrat politicians on the Senate Finance Committee, published an editorial saying that while they saw the value of an appellate body, it “needs to operate as the members agreed”.


Of the WTO’s 163 other members, 117 have signed a joint letter calling upon America to end the impasse.


Although America has been the heaviest user of the dispute-settlement system, others will miss it too (see chart).


Some have already begun preparing, for example by agreeing at the start of any disputes to forgo the right to appeal.


The EU, Canada and Norway have agreed on an interim arbitration mechanism that will use retired members of the appellate body as judges.


And the EU is considering beefing up its own enforcement mechanism to fill the hole left by the appellate body, though it would probably cleave more closely to the outcomes of first-stage rulings in WTO disputes.


But some members are likely to shun such alternatives—especially those that expect to be sued a lot.


And it is unclear how robust they will be if disputes turn nasty.


Some WTO members may try to choose their dispute-settlement mechanism case by case.


An organisation as ambitious as the WTO, for all its faults, will be easier to break than replace.


All this means that global trade is about to become a lot less predictable and a lot more contentious.


Without the appellate body to act as honest broker, disputes between the biggest members may escalate.


Under the GATT America acted as global trade sheriff, launching investigations at will and bullying disputatious countries into submission.


It is not impossible that it will resume this role.


On November 27th the Trump administration announced that it had nearly finished an investigation into a French tax on digital services, which America reckons discriminates against its tech giants.


You’ll miss it when it’s gone
In the 1980s American unilateralism was no fun for countries on the receiving end.


But at least back then Uncle Sam could point to the lack of any other power even theoretically capable of doing the job.


Now the absence of independent referees is America’s own doing.


And of all Mr Trump’s trade policies, it may prove the hardest to reverse and have the longest-lasting effects.


|SHANGHAI

Finance & economics | Life after tariffs
Trade war?


China’s exporters have expanded their global market share
As America raises its walls, Chinese companies find new terrain

AYEAR AGO an economic forecasting unit in the Chinese government published an outlook for the coming year.


The big worry, it concluded, was the external environment.


Shipments to America, China’s biggest customer, would suffer as the trade war dragged on.


China had maxed out its exports to other big countries, and others were too small to make a difference.


So China’s boffins are, like many others, surprised by how things have gone.


Exports to America are indeed down, by nearly 15% so far this year.


But exports to the rest of the world have been much stronger (see chart).


China, it turns out, had more to sell to its big customers: exports to Europe are on track to surpass exports to America this year.


Meanwhile exports to smaller markets in South-East Asia, such as Vietnam and Malaysia, have boomed.


According to data from CPB World Trade Monitor, China’s share of global exports has reached 11.9%, slightly higher than in July 2018, when the first American tariffs hit.


Sluggish imports—in part because of a domestic slowdown—mean the trade surplus is set to be about a quarter bigger in 2019 than in 2018.


One explanation for China’s resilient exports is the yuan’s 6% depreciation against the dollar since the trade war began.


China’s currency has also weakened against other major trading partners.


A second is goods routed through other countries to avoid tariffs.


Some sent to South-East Asia have ended up in America.


Vietnamese customs officials have stepped up checks of everything from seafood to aluminium to ensure that they are not relabelled Chinese goods.


Julian Evans-Pritchard of Capital Economics, a research firm, estimates that American tariffs have cut Chinese GDP growth by about 0.6 percentage points, but that trans-shipments through South-East Asia may have lifted it back up by 0.3 percentage points.


There is also a third, more positive explanation: Chinese companies are highly competitive.


Once an assembly centre, China now makes more of the inputs that go into final goods.


Its efforts in high-tech sectors such as semiconductors are well-known.


But it is making lower-tech progress more broadly.


The Chinese light-industry council, representing toymakers, food firms and the like, estimates that its 100 most technologically advanced members invest 2.5% of revenues in research and development, high by international standards; it is pressing them to hit 3%.


The road ahead will not be easy for Chinese exporters.


The longer American tariffs last, the more likely American buyers are to find alternatives.


The fall in Chinese sales to America has accelerated recently.


On December 4th Chinese exporters of machinery and electronics met for their annual conference.


The theme was “flourishing together along One Belt, One Road”, in line with the government’s policy of promoting economic ties with Asia, Africa and Europe.


In previous years that might have been politically astute positioning.


|Washington, DC

Finance & economics | In the foothills
America and China reach a “phase one” trade deal
Details are scanty, but new American tariffs due this weekend are cancelled

AMERICAN TRADE deals typically stretch to thousands of pages.


The new “phase one” trade deal between America and China takes up only 86.


Robert Lighthizer, the United States Trade Representative (USTR) gave journalists a glimpse of it on December 13th, hours after it had been agreed.


And he said that after a few weeks of checks for legal errors and inconsistencies it would be published.


He expected that it would then be signed in the first week of the new year.


That a deal exists in writing is good news.


Even better, both the Chinese and the Americans seem to be on roughly the same page.


At a press conference in Beijing, Wang Shouwen, the Chinese deputy representative of international trade negotiations, described a text with nine chapters, including ones on intellectual property, technology transfer, financial services, “expanding trade” and dispute settlement.


A different Chinese official said that in this first phase the Americans had promised to cancel some of its tariffs.


Mr Lighthizer specified that this meant cancellation of tariffs due on December 15th, and that tariffs of 15% on around $120bn of imports would be reduced to 7.5%.


On some details, Mr Lighthizer was more forthcoming than the Chinese.


In return for the tariff reductions, he said that China would be ramping up by $200bn over two years its imports from America of agricultural products, manufactured goods, energy products and services.


Negotiators had set out targets for categories of commodities, so that Chinese agricultural purchases from America would rise from a baseline of $24bn in 2017 to at least $40bn in 2020 and 2021, and perhaps even higher.


But those figures would be kept secret, in case they had an impact on markets.


These managed-trade arrangements will attract plenty of well-deserved criticism.


It is hard to see how China could meet its targets while keeping its commitments of non-discrimination made under the World Trade Organisation’s rules.


Joe Glauber of the International Food Policy Research Institute, formerly chief economist of the US Department of Agriculture, warns that countries such as Brazil, Canada and Australia will have tough questions to ask.


He also questions the decision to keep the numerical targets secret, asking “how else would producers get signals on what to plant?


” In any case, the targets seem high enough that they will certainly distort economic flows, and leave American producers even more vulnerable to another breakdown in relations.


China, for its part, does not like the idea of becoming so heavily reliant on America for its imports of commodities such as soyabeans.


And it had long insisted that it was unrealistic for Mr Trump to demand that it double its purchases of agricultural products from America.


Intriguingly, China demurred from mentioning any hard targets in its statements about the trade deal.


Is China embarrassed about having made such a large unwanted concession?


Or are the purchase agreements not as rock-solid as American officials have made them out to be?


That will become clearer when the agreement is published.


It does seem as though the Chinese have made some healthy promises to open up their markets.


Mr Lighthizer boasted of commitments on intellectual property that were “similar”, albeit narrower, than those in the USMCA, a recently agreed trade deal between America, Mexico and Canada.


On the issue of forced technology transfers, which was at the heart of America’s first tariff action in this trade war, he said that the Chinese authorities had agreed not to ask companies to hand over their technology as part of the process of securing a licence to do business.


If implemented, this would represent significant progress.


Jake Parker of the US-China Business Council, a lobby group representing American companies operating in China, notes that this type of technology transfer was the biggest concern for many of his group's members.


In their press conference the Chinese insisted that their commitments were in line with their broader economic strategy of opening up, and would help improve the business environment.


Indeed, cynics will note that many of the reforms apparently linked to the deal are ones that China has already started implementing in recent years, raising questions about whether the nearly two-year-long trade battle has truly moved the needle for Chinese economic policy.


On whether the deal would make a difference, Mr Lighthizer said that though he thought it would, it was probably wise to say “we’ll see”.


Without more details, it is hard to assess its scope.


Until the deal is signed on the dotted line, the threat of renewed trade hostilities will linger.


Even after that, the deal’s enforcement provisions will cause some anxiety.


Ultimately Mr Lighthizer will be the one to decide whether China has broken its commitments, not an independent arbiter.


And, in forming his view, he will be able to consider evidence based on anonymous complaints from American companies.


This fixes a real problem, which is companies’ fear of retaliation leading them to hold their tongues in front of the authorities.


But it comes with a risk, of making the Chinese feel that they are being accused of a problem they can neither verify nor easily fix.


And it means that it is not hard to see how tensions might escalate again.


The Chinese do have an incentive to play along.


Both sides said that the success of the first phase of talks would determine success in the second, which would presumably unlock further tariff cuts.


The Americans seem to want to go further too.


On December 13th Mr Lighthizer spoke of climbing a huge mountain a little bit at a time.


Finance & economics | By the numbers
How US-China trade has changed
A year of disruption in charts

AFTER AN apparent detente between America and China in late 2018, trade relations soured again at the start of 2019.


Over the course of the year America ratcheted up tariffs, and its bilateral trade deficit with China fell.


But market forces are powerful, and trade finds a way.


America’s bilateral deficits with several other countries, including Mexico, rose.


Meanwhile Chinese exporters found new homes for their goods, including Vietnam and the Philippines.


Next year is likely to see trade patterns further disrupted, as Chinese policymakers aim for a Trump-pleasing increase in imports from America.


Leaders | The superpower split
Don’t be fooled by the trade deal between America and China
The planet’s biggest break-up is under way

ON JANUARY 15TH, after three years of a bitter trade war, America and China are due to sign a “phase one” deal that trims tariffs and obliges China to buy more from American farmers.


This modest accord cannot disguise how the world’s most important relationship is at its most perilous juncture since before Richard Nixon and Mao Zedong re-established links five decades ago.


The threat to the West from China’s high-tech authoritarianism has become all too clear.


Everything from its pioneering artificial-intelligence firms to its gulags in Xinjiang spread alarm across the world.


Just as visible is America’s incoherent response, which veers between demanding that the Chinese government buy Iowan soyabeans and insisting it must abandon its state-led economic model.


The two sides used to think they could both thrive; today each has vision of success in which the other lot falls behind.


A partial dismantling of their bonds is under way.


In the 2020s the world will discover just how far this decoupling will go, how much it will cost and whether, as it confronts China, America will be tempted to compromise its own values.


The roots of the superpower split go back 20 years.


When China joined the World Trade Organisation in 2001 reformers at home and friends abroad dreamed that it would liberalise its economy and, perhaps, its politics too, smoothing its integration into an American-led world order.


The West has faced a financial crisis and turned inward.


China’s behaviour has improved in some ways: its giant trade surplus has fallen back to 3% of GDP.


But it has an even bleaker form of dictatorship under President Xi Jinping and has taken to viewing America with distrust and scorn (see article).


As with every emerging great power, China’s hankering to exert its influence is growing along with its stature.


It wants to be a rule-setter in global commerce, with sway over information flows, commercial standards and finance.


It has built bases in the South China Sea, is meddling with the 45m-strong Chinese diaspora and bullying its critics abroad.


President Donald Trump has responded with a policy of confrontation that has won bipartisan support in America.


Yet the China hawks thronging Washington agencies and corporate boardrooms share no consensus over whether America’s goal should be the mercantilist pursuit of a lower bilateral trade deficit, the shareholder-driven search for profits in American-owned subsidiaries in China or a geopolitical campaign to thwart China’s expansion.


Meanwhile, Mr Xi oscillates between grim calls for national self-reliance one day and paeans to globalisation the next, while the European Union is unsure if it is an estranged American ally, a Chinese partner or an awakening liberal superpower in its own right.


Muddled thinking brings muddled results.


Huawei, a Chinese tech giant, faces such a disjointed campaign of American pressure that its sales rose by 18% in 2019 to a record $122bn.


The EU has restricted Chinese investment even as Italy has joined China’s belt-and-road trade scheme.


China spent 2019 promising to open its big, primitive capital markets to Wall Street even as it undermined the rule of law in Hong Kong, its global financial hub.


The phase-one trade deal fits this pattern.


It mixes mercantilist and capitalist goals, leaves most tariffs intact and puts aside deeper disagreements for later.


Mr Trump’s tactical aim is to help the economy in an election year; China is happy to buy time.


Geopolitical incoherence is neither safe nor stable.


True, it has not yet inflicted a big economic cost—since 2017 bilateral trade and direct investment flows between the superpowers have dropped by 9% and 60% respectively, but the world economy still grew by about 3% in 2019.


Some businesses, such as Starbucks’s 4,125 cafés in China, need never be affected.


But confrontation is constantly spreading into new arenas.


America’s campuses are convulsed by a red scare about Chinese spying and intimidation (see Briefing).


Rows blaze over athletes kowtowing to China, naval docking rights and alleged censorship on TikTok, a Chinese app used by teenagers worldwide.


In the background is the risk of a confrontation between the superpowers over Taiwan, which holds elections in January (see article).


Each side is planning for a disengagement that limits the other superpower’s day-to-day influence, reduces its long-term threat and mitigates the risk of economic sabotage.


This involves an exceptionally complex set of calculations, because the two superpowers are so intertwined.


In technology, most electronic devices in America are assembled in China, and, reciprocally, Chinese tech firms rely on foreign suppliers for over 55% of their high-end inputs into robotics, 65% of those into cloud computing and 90% of those into semiconductors.


It would take 10-15 years for China to become self-sufficient in computer chips and for America to shift suppliers (see Technology Quarterly).


Likewise in high finance, which could serve as a vehicle for sanctions.


The yuan accounts for just 2% of international payments and Chinese banks hold over $1trn in dollar assets.


Again, shifting trade partners to the yuan and winding down the banks’ dollar exposure will take at least a decade, probably longer.


And when it comes to research, China still trains its best talent and finds its best ideas in America’s world-beating universities—at the moment there are 370,000 mainland students on campuses in the United States.


Were the superpower rivalry to spiral out of control, the costs would be vast.


To build a duplicate tech hardware supply-chain would take $2trn or so, 6% of the superpowers’ combined GDP.


Climate change, a great challenge which could provide a common purpose, would be even harder to cope with.


Also at stake is the system of alliances that is a pillar of America’s strength.


Some 65 countries and territories rely on China as their largest supplier of imports and, asked to choose between the superpowers, not all of them would opt for Uncle Sam—especially if it continues to pursue today’s policy of America First.


Most precious of all are the principles that really made America great: global rules, open markets, free speech, respect for allies and due process.


In the 2000s people used to ask how much China might become like America.


In the 2020s the bigger question is whether a full superpower split might make America more like China.


|SHANGHAI AND WASHINGTON, DC

Finance & economics | Between the lines
The new US-China trade deal marks an uneasy truce
A truly grand pact remains some way off

WITH HIS habit of announcing trade deals only for them to dissolve within weeks, President Donald Trump is a standing reminder that talk is cheap.


But on January 15th he signed a phase one trade agreement with China alongside Liu He, the Chinese vice-premier, and published its contents for the world to see.


The 86 pages set out the terms of a new economic relationship between these two giants.


Alongside some welcome measures, there are some howlers—and glaring omissions.


Throughout the whole, however, runs a common pattern.


Clauses that are in reality concessions wrung from the Chinese are often written in such a way that they formally apply to both sides—but with subclauses specifying the actions that the Chinese are to take.


For example, pledges to protect trade secrets are accompanied by new processes by which American companies can complain about breaches.


The deal also addresses several long-standing American complaints about China’s foot-dragging.


China pledged that approvals of agricultural biotechnology products will take less than two years.


The deal sets deadlines for China to consider licence applications by MasterCard and Visa.


And China will lower bureaucratic barriers to imports of American dairy, pork and beef.


As many a weary trade negotiator can attest, China has a history of reneging on promises.


But this deal comes with a novel dispute-settlement mechanism.


After a speedy consultation, either party may find fault with the other.


(History suggests that the Americans are more likely to feel aggrieved.


) If a solution cannot be reached, the accuser can unilaterally impose penalties.


The accused cannot retaliate, short of pulling out of the deal altogether.


It is possible that this mechanism will force China to address American grievances.


It hands huge discretion to Robert Lighthizer, the United States Trade Representative (USTR).


Take China’s ever-contentious yuan regime.


On January 13th, in a sign of thawing relations, the American Treasury removed China from its list of currency manipulators.


But if at some point China is put back on the list, the USTR would now seem to have virtually unchecked power to slap tariffs on it.


Further problems may be caused by China’s pledge to buy an extra $200bn of American goods and services over the next two years, on top of a baseline of $187bn in purchases in 2017.


That is intended to satisfy Mr Trump’s main desire: to close America’s trade deficit with China.


But making it happen will probably require China’s government to direct Chinese companies to buy lots of American goods.


Both countries will become more reliant on each other, which neither wants.


And their other trading partners might be squeezed out.


The Americans do not seem overly concerned.


Mr Lighthizer is keen to move on to implementation, saying that, as the first deal of its kind, “we have to make sure that it works”.


The coming months will demonstrate whether the two countries can establish a friendlier dialogue, and whether their relationship can survive America’s more aggressive use of security-related export and investment restrictions.


As Mr Lighthizer noted, China’s cyber-intrusions and industrial subsidies still rankle with America.


Chinese media, meanwhile, laid out an argument that may become more familiar: if American export restrictions prevent China from fulfilling its purchase commitments, the fault will lie with America.


A truly grand pact between the two countries is some way off—and indeed, may never arrive.


But this modest trade agreement shows how much the status quo has changed.


Tariffs on hundreds of billions of dollars’ worth of imports into both countries remain in place, with an ever-present threat of more.


This is not trade peace, but rather a trade truce—and a tense one at that.


|BERLIN

Europe | Cyber-security in Germany
Angela Merkel is loth to take sides over Huawei
But German lawmakers may force her to

EVERY GERMAN knows the torments of Funklöcher, the patchwork of telephonic dead spots unmolested by radio signals, where smartphones fall silent and internet connections evaporate.


Stuck for years in the slow lane of the rich world’s telecoms, Germany is determined not to be left behind as fifth-generation (5G) networks gear up to connect factories, cars and devices.


But the government’s plans have hit an unexpected roadblock.


Like other rich countries, Germany has been agonising over whether to let Huawei, a Chinese telecoms giant, bid for contracts to build its 5G networks.