American and Chinese negotiators agreed to split their differences with a rollback of half the tariffs that the US earlier imposed on $350 billion of Chinese imports, opening the way to an armistice in the Sino-American trade war. US President Donald Trump was meeting with his trade team at deadline, and was said to have signed a deal that “they want…and so do we,” as the president tweeted earlier today. Stock prices rose on the news with major US equity indices up by almost 1%.

The US also would cancel plans for a 25% tariff on an additional $156 billion of Chinese goods now scheduled to take effect on December 15. In return, China would commit to a specific volume of agricultural purchases and agree to open its market to US financial services. The reported content of the deal is unsurprising. A partial tariff rollback allows Beijing to claim that the deal is equitable, and the commitment to more Chinese purchases of US farm products gives the president ammunition for the 2020 presidential campaign.

President Trump indicated last Oct. 12 that an armistice in the trade was likely. That triggered a 10% gain in the US S&P 500 equity index through this afternoon, and contributed to a wave of hiring reflected in strong gains in the November employment statistics. At the time I predicted that the president’s trade pivot would secure his re-election in 2020.

Notably, both the US and Chinese economies have shown signs of improvement after weak economic signals through most of 2019.

The global manufacturing sector was hardest hit by the trade war. US manufacturing shrank during the first three quarters of 2019, according to the Federal Reserve’s industrial production index, and China’s Caixin purchasing managers’ index suffered an air pocket early in 2019. But the manufacturing sector in both countries turned up during the past several months. Both economies suffered, but the US suffered as least as much as China. President Trump evidently thinks that compromise at this point is the better part of valor.

The US administration’s parallel effort to suppress the emergence of China’s national champion Huawei as a dominant player in telecommunications equipment has failed. Virtually the whole of the Eurasian continent is buying Huawei equipment to roll out 5G mobile broadband. US restrictions on the sale of critical components to Huawei and other Chinese companies, moreover, haven’t slowed the Chinese firm. China has either sourced such components from competitors in Asia or built domestic substitutes. 

After a year in which neither tariffs nor export restrictions put much of a dent into China, a retrenchment of US policy is the rational course of action. What President Trump has on his desk today is not a peace, but a truce. It is not clear how the rivalry between the United States and China will proceed. 

Some of America’s China hawks have shifted their focus from trade war to improving the competitiveness of US industry. In a December 10 speech, Senator Marco Rubio (R-FL), one of the most prominent hawks, shifted focus from trade to US industrial policy. Rubio declared:

“So while it may be true that China is ‘breaking the rules’ or that Chinese companies are engaging in ‘unfair competition’ against the American order, the fundamental challenge will not simply be solved by some future trade agreement… we must respond to the challenge before us is because the industries that China intends to dominate are the very ones that will create the dignified and productive work Americans need for us to remain a strong nation…. American policymakers must pursue policies that make our economy more productive by identifying the critical value of specific industrial sectors and spurring investment in them.”

Republican elder statesman Newt Gingrich, a former speaker of the House, made similar arguments in his new book Trump vs. China, as I reported in a Nov 27 review.

Trade and technology restrictions brought Washington to an impasse. China’s internal market buffers the country against the impact of tariffs, and its technological lead in 5G mobile broadband is too commanding for the United States to contain it. The United States always does the right thing, Winston Churchill quipped, after exhausting the alternatives, and it may be that the next phase of Sino-American rivalry will be conducted in the field of industrial and technology policy.