COMMENTARY - De-escalation in the trade dispute: An important respite for the global economy and some hope for a better relationship between the US and China

Was it the beautiful, calming view of the Alps and peaceful Lake Geneva from the residence of the Swiss ambassador to the UN that had such a relaxing effect? ​​We don't know how much Switzerland's good offices at the Geneva talks contributed to the recently announced de-escalation in the trade dispute between the US and China. Presumably, it was a combination of economic common sense and domestic political necessity that prompted both parties to temporarily reduce their prohibitive bilateral punitive tariffs to 30 percent and 10 percent, respectively.

Despite all their rivalry, the world's two largest economies are still far too closely linked economically for a sudden standstill and redirection of bilateral trade to make sense. While the US and China want to become more independent of each other, the economic costs of a comprehensive decoupling are far too high for both sides.

Trump must fear a sharp rise in inflation and the loss of a key customer for his farmers and the agricultural sector. China is already struggling with the consequences of the bursting real estate bubble and the resulting difficulties for hopeful Chinese graduates in finding suitable employment. If all the wage workers who produce smartphones, electronics, toys, furnishings, and shoes for the American market were to lose their jobs, this would certainly not be welcome for the Chinese leadership.

The agreement announced between the US and China on Monday morning therefore represents a welcome breakthrough in at least immediate economic common sense. For the time being, however, it is primarily a ceasefire in true Trumpian style. Similar to what Trump did with the other countries against which he imposed "reciprocal" tariffs, a 90-day period has been agreed upon during which both sides will suspend their prohibitive tariffs and return to the status quo before the escalation of their trade dispute.

Over the next three months, intensive discussions are expected to lead to a broader agreement that addresses the concerns of both sides. At the end of the Geneva talks, the Chinese and American negotiators vowed that they understood each other better. US Trade Representative Jamieson Greer stated that they had come to the realization that the differences between the two sides may not be as significant as originally thought. They now want to address the root causes that led to Trump's "national emergency."

This sounds similar to the negotiations that ultimately led to the so-called "Phase One Agreement" in January 2020 during Trump's first presidency. This agreement was intended to eliminate structural trade barriers. At the time, China also promised to purchase $200 billion more in goods from the US than before. But the agreement was never properly implemented. This can be attributed to a lack of will, but also to the coronavirus pandemic, which intervened.

If the US and China now pick up where they left off under Trump before the pandemic, this will once again urgently raise the question of how seriously the two sides actually want and can improve their relationship and eliminate the structural imbalances in bilateral trade.

The decisive factor will be whether and to what extent the Chinese leadership under Xi Jinping is willing, despite all the rivalry and systemic differences, to trust the American administration and seek a constructive relationship with it. In the United States, in turn, the key question is whether, despite all the security hawks, the realization will prevail that China's rise to a powerful, innovative economic power can no longer be stopped and that it is better to deal with it constructively.

This demands a considerable amount of insight and trust from Xi and Trump. The two self-confident leaders will have to literally step out of their comfort zone. Whether the now-agreed ceasefire will actually lead to a new, peaceful relationship that benefits both parties is therefore far from certain. For now, this remains hope, but the top-level talks this weekend, with a view of Lake Geneva, have at least given the global economy a welcome respite.