US and China de-escalate trade war
December 4, 2018 | Expert Insights
At a post-G-20 summit meeting in Buenos Aires, the US and China have agreed to halt new trade tariffs for 90 days, after one of China’s decisions contributed to a visible progress on closing the trade gap.
Background
Two of the world’s largest economies, the US and China, are involved in a months-long trade dispute. At the heart of the dispute are U.S. allegations of Chinese theft of intellectual property and unfair trade practices. Washington has accused China of stealing trade secrets and forcing American firms to hand over technology in exchange for access to the Chinese market. They are also locked in a dispute over their trade imbalance.
Trump imposed import taxes on $250 billion on Chinese products - 25 per cent on $50 billion worth and 10 per cent on the other $200 billion in July 2018. China retaliated by imposing duties on $110bn of US products. Trump had planned to raise the tariffs on the $200 billion to 25 per cent if he couldn’t get a deal with Xi at the G20 Summit.
Analysis
US President Donald Trump and his Chinese counterpart Xi Jinping have agreed to halt new trade tariffs for 90 days to allow for talks. The breakthrough came after a dinner meeting between President Donald Trump and Chinese leader Xi Jinping at the Group of 20 summit in Buenos Aires. If there is no deal at the end of the 90-day grace period, the US will increase tariffs on the USD 200 billion of goods from 10 per cent to 25 per cent.
Trump agreed to hold off on plans to raise tariffs from Jan. 1 on $200 billion in Chinese goods. The Chinese agreed to buy a “not yet agreed upon, but a very substantial amount of agricultural, energy, industrial” and other products from the United States to reduce America’s huge trade deficit with China, the White House said. China has agreed to “reduce and remove” tariffs below the 40% level that Beijing is currently charging on US cars.
The temporary truce will allow the countries to work out their differences in a dispute. “It’s an incredible deal,” Trump said adding, “if it happens, it goes down as one of the largest deals ever made.” Trump said: “What I’ll be doing is holding back on tariffs. China will be opening up, China will be getting rid of tariffs. … China will be buying massive amounts of products from us.”
The U.S. and China also made progress on the regulation of fentanyl, which is 50 times more powerful than heroin. U.S. officials for years have been pressing the Chinese government to take a tougher stance against fentanyl, and most U.S. supply of the drug is manufactured in China. China agreed to label fentanyl, the deadly synthetic opioid responsible for tens of thousands of American drug deaths annually, as a controlled substance. Beijing also agreed to reconsider a takeover by U.S. chipmaker Qualcomm that it had previously blocked.
White House press secretary Sarah Sanders said China’s decision to label the drug as a controlled substance means that “people selling Fentanyl to the United States will be subject to China’s maximum penalty under the law.” The White House also said that China’s government is “open to approving” the purchase of Dutch semiconductor manufacturer NXP by American chipmaker Qualcomm.
China also “agreed to reduce and remove tariffs on cars coming into China from the US” said President Trump. China, which is the world's largest market for cars, imposed a 40% tariff on US vehicle imports. The rate is much higher than the 15% it places on other trading partners and forced many carmakers to raise prices. US and China have pledged to "immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft", according to the White House.
Asian markets rallied after news of the trade war truce. In China, Hong Kong's Hang Seng index climbed 2.5% and the Shanghai Composite index jumped 2.6%. Japan's Nikkei 225 index rose 1%. The gains spread to Europe, with the UK's FTSE 100 index, the Cac 40 in France and Germany's Dax index all up by about 2% in early trade.
Assessment
Our assessment is that Trump’s steadfast negotiation tactics have allowed the US to secure some commitment from the Chinese. There is now a movement from confrontation to engagement. We feel that the US will gradually work on security concerns like China’s attempt to expand in the South China Sea and China’s cyber-enabled theft of US intellectual property. We believe that it is important to ensure the Chinese ‘do not lose face’ in the current trade war.
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