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Will the US-China trade deal live up to expectations?

John Redwood, Charles Stanley's Chief Global Economist, looks at the potential trade deal between Washington and Beijing.

Trade war - USA v China

by
John Redwood

in Features

04.04.2019

President Trump usually encourages high expectations of what he and the US might achieve. A deal-maker by instinct and long business practice, he has made much of his ability to get the country a better deal. These claims are now on trial as we approach the end game of the US-China trade talks.

The President points to the massive $419bn deficit the US chalked up last year with China and argues this must be the result of unfair rules and skewed business practises. He blames variously an undervalued Chinese currency, the theft of intellectual property, asymmetric tariffs, state aid and interventions by China, and lack of access to the Chinese market for US investors and sales people.

There is some truth in the accusations President Trump makes. China has conceded that the old tariffs were one sided. They have been trying for some time to avoid provocative devaluation of their currency, which is not entirely in their control given the way it now trades on world markets. They wish to reassure the US that their law respects other people’s intellectual property, and are prepared to strengthen its terms and enforcement. They seem to be shifting a bit on the issue of whether a US company can in the future set up in China without having to have a Chinese partner holding part of the equity.

Central to the present talks we are told is the US wishes to see hefty increased purchases of identified items the US produces to have some impact on the highly-visible large deficit. There is a sketched six-year plan to eliminate the deficit. The US side is keenest on tangible orders that could get the short term deficit down in time for the next Presidential election campaign. President Trump wants some hard figures he can quote to show that as a result of his tough talking the US is selling more to China. China is interested in US soybeans and energy. There may be plans to buy more US aircraft, but the tragic loss of life in two recent Boeing crashes has resulted in the grounding of all the Boeing 737 Max aircraft. This is not a helpful background for China to step up purchases.

Whilst the current talks are said to be nearer the end game, they are also rumoured to be difficult over the issues of good faith and enforcement. The US has heard promises from China on these items before. They want something they can bank. China wants the US to remove her recent tariffs from their trade on the announcement of the deal, whilst the Trump side wants to keep some of them on until there is more proof that China is behaving differently this time. There are disagreements about when and where Presidents Xi and Trump should meet to announce the deal. China is concerned in case at the last minute President Trump rejects the arduous work of the negotiating teams and walks out of a meeting with the Chinese President without confirming the deal. That would be unacceptable conduct from the Chinese point of view. China has apparently rejected the idea of announcing it in the US as part of a State visit for President Xi, presumably because it gives the US more power over the media and the interpretation of what has been agreed.

A good deal for world markets would be one that removed all the tariffs imposed so far in the trade war and brought some of the high Chinese tariffs down. It would need to have convincing changes on intellectual property, and confirm the idea that a US company investing in China need to no longer have a Chinese partner. It would include contracts or bankable future orders for more US goods like soybeans and energy than China is currently buying. Markets have rallied in part on the prospects of a better trade deal between the two largest economies of the world. This may prove to be a case of being better to travel than arrive. It seems likely the improvements in trade relations between the two will be partial, not comprehensive. There may well remain issues over enforcement and how far in reality the deal has gone to improve matters.

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