An end to the trade war?

An end to the trade war?
US and China have declared a truce in the ongoing trade dispute between the two countries. However, it should be noted that as the commitments made..

US and China have declared a truce in the ongoing trade dispute between the two countries. However, it should be noted that as the commitments made by both nations are vague, there are concerns that this truce would be temporary.

Background

China is a major market for US agricultural products, machinery, and cars as well as other products. In 2016, it was the third largest market for US exports. According to the American Apparel & Footwear Association, more than 41% of clothing and 72% of footwear sold in the US are made in China. China's trade surplus with the United States widened in 2017 while total foreign trade volume maintained rapid growth.

Former chief executive of Hong Kong Tung Chee-hwa recently said that a trade war must be avoided. “In such a big relationship, there is bound to be disagreement, but rash action on either side will only create the environment for a very serious trade war, which is not good for any country. Patient discussion and negotiation, particularly considering the long-term prospects of the relationship, will be very important,” he said.

In recent weeks, Washington announced that Chinese imports would be hit with tariffs worth US$60. The trade sanctions triggered retaliation from China’s foreign ministry, which said that Beijing would “take all legal measures to protect our interest.” On March 23rd, 2018, China unveiled tariffs on $3 billion of US imports as a response to the US’ actions. In addition to these tariffs, it has been reported that China will take up legal action against the US at the World Trade Organization.

Analysis

In May 2018, officials from the US and China conducted high levels talks in Beijing regarding trade ties. The talks were led by Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He in Washington.

A report from Financial Times had noted that the US has demanded China to dramatically reduce the tariffs. In fact, Washington has demanded Beijing trade deficit has to be cut by 200 billion dollars. Experts have suggested that China is less prepared than Washington to engage in these talks and this would ultimately hurt the nation at the present point.

In recent weeks, there have been some positive developments indicating that both the US and China were working out a compromise. President Trump had indicated that he was willing to soften his stance on sanction-hit ZTE, ahead of a second round of trade talks. This was a complete turnaround from April 2018, when Washington slapped the Chinese multinational telecommunications equipment and systems company with a seven-year ban on purchases of crucial American technology. The sanctions were a result of the company illegally shipping US technology to Iran.

Now, both US and China have announced a truce over the trade dispute. Experts have however expressed concerns that this will prove temporary if the nations fail to deliver on their vague commitments to re-balance trade. “We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday after the two sides released a joint statement a day earlier. “Right now, we have agreed to put the tariffs on hold while we execute the framework.”

The two countries have also agreed that China would increase its purchases of US goods. “To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services,” they said.

According to US authorities, China has agreed to cut US trade deficit with China. It was around $375bn (£278bn) in 2017. However, Beijing has not agreed to cut the deficit by a particular amount. Washington has asked for a reduction of $200 billion.

Tai Hui, JP Morgan’s chief market strategist for Asia Pacific noted, “Historical precedents suggest the U.S. could re-engage with China on trade issues if it sees China dragging its feet on fulfilling its pledges. Moreover, the last three months have further exposed Washington’s concerns over China’s advancement in technology and its threat as a competitor, both commercially and strategically. It’s like a back pain that never goes away. It was a shock in the first instance it happened, but then life goes on as the most acute symptoms are addressed. The good news is that markets should learn to live with it and consider its impact more rationally.”

Reports have also suggested that one of the reasons President Trump has sought to put aside differences with China is his concerns regarding North Korea. Recently, North Korea stated that it was considering pulling out of the upcoming summit with Washington. President Trump agreed to go easier on ZTE due to fears that China was behind North Korea’s change in its stance.

Assessment

Our assessment is that both China and the US recognized that a prolonged trade dispute between the two largest economies in the world would only serve to hurt them. However, concerns now remain regarding vague commitments made by both nations. China has not given a specific target regarding how much of its trade deficit with the US it would cut down. Could that become the trigger that could result in the breakdown of this agreement in the near future?

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