Podcast | Digging deeper: US-China trade truce, just an eyewash? – Moneycontrol.com

Podcast | Digging deeper: US-China trade truce, just an eyewash? – Moneycontrol.com

At the end of a long-awaited and avidly watched meeting between Donald Trump and Xi Jinping in Argentina last December 1 during the G-20 Summit, China pledged to purchase more goods from the U.S. and open its market, while Washington decided to postpone plans to raise tariffs on Chinese goods.

Hi, this is Smita and this is the Money Control Deep Dive and we will try and decode the implications of this trade truce between the two economic giants but as always, it is important to understand the context of this meeting.

As is common knowledge, harmonious diplomacy is not US President Donald Trump’s strong point. He likes to stir things up and as The Guardian’s Jeffrey Frankel reported on November 27, 2018, Trump’s trade wars are making us all poorer.

Jeffrey Frankel is a professor at Harvard University’s Kennedy School of Government and also served as a member of President Bill Clinton’s Council of Economic Advisers. He possibly knows what he is talking about.

A protectionist world-view

At the heart of the trade wars that Trump has been waging with multiple countries, is protectionism or the theory of shielding America’s domestic industries from foreign competition by taxing imports.

Frankel believes that Trump’s protectionism is hurting the US trade balance (when one includes the effects of his administration’s fiscal policies).

In his words, “The world is in a trade war and there is no sign of peace breaking out anytime soon. By now, the disruption to trade appears extensive enough to factor negatively into forecasts for economic growth. Does that mean the Federal Reserve should stop gradually raising interest rates? The answer is no. Monetary policy cannot mitigate the damage done by foolish trade policies.” Unquote.

Notice the use of the word “foolish” The implication in the word follows Trump around like that infamous , orange baby blimp that even stalked him during the G-20 summit at Buenos Aires. This is a word that is not often used openly in diplomatic circles but was implied in the laughter of Members of the United Nations‘ General Assembly in September when Trump boasted about the achievements of his administration. And more recently at the G-20 summit when the President was seen wandering off the stage and away from his Argentinean counterpart, President Mauricio Macri, just as the two leaders were supposed to pose for a photo opportunity. As an aide began to chase down the American President, the reporters at the venue began to laugh.

Unfortunately, trade wars are no laughing matter and they have global ramifications.

As Frankel’s Guardian piece points out and we quote, “It is a truism among the economically literate that there are no winners in a trade war. But it is also true that even relatively large statistical effects for individual economic sectors tend to have a relatively small impact on quarterly GDP, at least in the short run. The discrepancy partly reflects the dominant share of services in modern advanced economies, relative to manufacturing and agriculture.

As the trade war broadens and deepens, however, economic-growth forecasts around the world are darkening. The OECD (The Organisation for Economic Co-operation and Development ) just became the latest international agency to downgrade its global growth forecast, from 3.7 percent to 3.5 percent in 2019 and 2020.” Unquote.

Contributing to this gloom is the US and China trade conflict. In January, the US was scheduled to raise recently imposed tariffs from 10 percent to 25 percent on Chinese imports worth $250 billion (£195 billion). Donald Trump had also threatened to impose new tariffs on the rest of Chinese imports, worth $267 billion.

This was of course before, Trump met Chinese leader Xi Jinping at the G20 summit in Buenos Aires.

We will discuss the result of the meeting shortly but let it be said first that Trump’s policies have been among the reasons behind an economic slowdown in China. And as the piece rightly points out, the Chinese slowdown, if prolonged, in turn, will have spillover effects on other countries, especially commodity exporters.

We quote, “The European economy has also slowed in 2018, with Germany even reporting a surprising contraction in the third quarter. Trade is among the reasons: reduced demand from China, unprecedented uncertainty about US trade policy and the looming prospect of a “hard” Brexit in which the United Kingdom leaves the European single market and customs union.” Unquote.

The US will not reap any benefits from such policies either. The forecasts show US growth slowing from 2.9 percent in 2018 to 2.1 percent in 2020.

And says the piece, ” The monthly US trade deficit reached $54 billion in September, exceeding in nominal terms the deficits recorded every month from 2009 to 2017. The tariffs are presumably having a negative effect on US imports but negative effects on US exports are also large. This was predictable. When income growth among trading partners slows, they buy less from the US. Moreover, China and other countries have retaliated against US goods with tariffs of their own. Meanwhile, because of the rapidly rising US budget deficit – a remarkable development in a country at full employment – an excess of spending power has spilled over into imports. And the dollar has appreciated against most currencies, undercutting US exporters’ competitiveness, again in line with theory.” Unquote.

Protectionist measures, observes Frankel, also increase prices, which has the opposite implication for monetary policy. If Trump follows through on his threats to impose tariffs on all car imports and to apply the 25 percent tariffs to all imports from China, the impact on US core inflation (which strips out food and energy prices) is to reach 0.3 percent by September 2019.

Other adverse trade developments outlined by Frankel are a negative supply shock and slower growth.

A temporary respite?

So under the circumstances, a truce seemed liked a sensible option. Bob Davis wrote in The Wall Street Journal on December 2, 2018 that a truce postponing added tariffs at the G-20 summit gives the two nations about three months to resolve issues that have long divided them. But it does not offer at first glance, any lasting peace.

The trade truce between the U.S. and China, though, he says, calms their economic battle and opens a brief window for the two nations to explore whether they can bridge deep divides on a range of difficult disputes.

The significant gain by China following a weekend dinner is that the U.S. has postponed its threat to increase tariffs on $200 billion in Chinese goods to 25 percent from 10 percent. But it set a timeline of only about three months for the two sides to negotiate several issues.

A long road ahead

However as many observers, including CNBC have said, it’s not over: The US-China trade war is still on despite 90-day tariff ceasefire. CNBC’s correspondent Yen Nee Lee wrote on December 3 that even though stocks in Asia traded higher and U.S. stock futures jumped after the meeting, experts have expressed doubt that any concrete steps to totally ease tensions between the two economic giants can be achieved within that time frame. Realistic trade deals, after all, take years to negotiate contentious issues.

The piece cited Steve Okun, a trade expert and a board member of the American Chamber of Commerce in Singapore and he noted that the additional tariffs that the U.S. and China have imposed on each other’s products are still in place, so the 90-day withholding of further levies doesn’t signal the end of the trade fight.

And as the piece point out and is implicitly understood, if the two countries fail to reach a deal at the end of 90 days, the threatened tariffs will be implemented. Also, significant is the fact that the 90-day period was not emphasized by the Chinese side.

This meeting is also part of an on-going pattern that experts says, Donald Trump is known for.

The piece cites Antonio Fatas, an economics professor at INSEAD who says that the development in Buenos Aires over the weekend was simply a continuity of the trade policy that the Trump administration has had. And that policy involves the president finding a way to “break” things and then fix them, which results in a sort of relief that things are back together, Fatas observed.

And he correctly observed,” So, it makes sense for the markets to be positive on this development because things look better than a week ago. But there’s no sense of direction, it’s not clear what battle we’re fighting here … it’s very hard to see the endgame when you don’t know what the strategy is here.” Unquote.

Too short a time period

CNBC says Trump has repeatedly attacked Beijing for practices such as intellectual property theft, barriers to American companies that want to operate in China and the massive trade imbalance between the two countries. And it cites Dutch bank ING’s belief, that realistically, a trade deal that addresses all the complaints that the U.S. has about China would take years to negotiate.

Political risk consultancy Eurasia Group also states astutely that Trump could lose his enthusiasm for a deal if he encounters criticism domestically for a weak agreement, if his fears over a US market downturn fade, and once the theatre of his meeting with Xi is over. We, after all, saw the same politics of optics during his Singapore meeting with North Korean Supreme Leader Kim in June this year that yielded plenty of photo-ops but little else.

CNBC also cites Taimur Baig, chief economist and managing director at Singaporean bank DBS who recalled the U.S.-Mexico-Canada trilateral trade deal where despite some middle ground, a whole bunch of tariffs remain on steel and other products.

Something better than nothing?

Jethro Mullen of CNN Business reported on December 3, 2018 that as far as investors are concerned, a ceasefire is better than an escalating trade war.

The piece reminds us that stocks jumped higher on Monday after the United States and China said they would try to settle differences through talks. Major indexes in Hong Kong and Shanghai leapt by more than 2.5 percent in morning trading in Asia, while Dow futures spiked about 450 points, or 1.8 percent. Stocks in Japan and Australia were also up.

In the piece, Tai Hui, chief market strategist for Asia Pacific at JPMorgan Asset Management says that this truce should be seen as Washington recognizing the potential damage on the US economy if tariffs escalate further.

Kerry Craig, global market strategist at JPMorgan Asset Management has also told CNN that small rays of light such as agreement between the two leaders create tactical opportunities for investors but he too, urged caution going into the new year and repeated that holding back on higher tariffs isn’t the same as lifting the ones already in place.

Craig stated also that things are still likely to get worse before they get better.

Some breathing space

On December 2, The New York Times reported that if nothing else, the trade truce by China and U.S. gives both sides political breathing room. The piece conceded though that the temporary truce is more a political agreement than a substantive one.

Keith Bradsher and Alan Rappeport reported how both sides immediately positioned the cease-fire as a domestic victory while staking out areas where they would not compromise. And the piece quotes a typical observation by Donald Trump that beyond the signature bombast says really nothing. We quote Trump, “It’s an incredible deal. It goes down, certainly — if it happens, it goes down as one of the largest deals ever made.” Unquote.

China’s foreign ministry on the other hand characterized the meeting as “very successful,” adding, “The two sides proposed a series of constructive plans on how to properly resolve existing differences and problems.” Unquote.

The eagerness to come to some sort of resolution could be attributed to, as we said before and as NYT points out, economic slow down in both countries. We quote,” The trade war has also started to bite American farmers and some manufacturers, while the United States stock market has erased almost all of its 2018 gains amid trade and economic jitters.” Unquote.

Also it is clear that both sides despite the agreement are not on the same page. As NYT observes and we quote, “The tough road to a more comprehensive trade deal could be seen in the disparity between the official statements released by the United States and China, with the two documents essentially disagreeing over what was agreed to by Mr. Trump and Mr. Xi.

The United States emphasized the 90-day window it has set for trade talks, while China made no mention of it. And the White House, which has accused China of stealing technology from American companies, said that Mr. Xi had agreed to negotiate immediately on forced technology transfer, intellectual property protection, non-tariff barriers and cyber theft. The statement from China said only that the two countries would work together to reach a consensus on trade issues but did not mention intellectual property.” Unquote.

The agreement sets a March 1 deadline for a conclusive trade deal and according to NYT, hints that the initial 25 percent tariffs that Trump placed on $50 billion in Chinese goods last summer could become permanent — if not in place for a protracted period. We quote, “Those initial tariffs were intended to largely spare American consumers while targeting imports that the administration sees as a threat to national security — like nuclear reactor parts, spacecraft and aeronautical gear. The tariffs were also imposed on a variety of other products, like agricultural equipment, that Beijing has made a priority with its Made in China 2025 industrial policies program.” Unquote.

There are suggestions that all the tariffs could be phased out as China meets its commitments to make changes over a period of time. It is possible that the initial tariffs on $50 billion of Chinese imports could be in place longer, until it is clear that China has kept its promises of wholesale structural changes, says the NYT piece.

If there is light at the end of the tunnel, it would finally resolve American and Chinese conflicts over questions of intellectual property protection, investment access and other issues since China joined the World Trade Organization in 2001.

For now, Trump is busy baking in the afterglow of the agreement and even stated this about China’s president and we quote: “The relationship is very special. This was an amazing and productive meeting with unlimited possibilities for both the United States and China. It is my great honour to be working with President Xi.” Unquote.

On December 1, David J. Lynch, however, wrote in The Washington Post that the limited bargain, recalls previous deals that administration officials have disparaged as unenforceable and unproductive.

The toughest issues, says the piece, have been left to future bargaining sessions.

Another interesting point was made by Aaron Friedberg, a China specialist at Princeton University who said that perhaps not since President Richard Nixon met Chinese leader Mao Zedong in 1972, have U.S.-China relations pivoted so closely around individual personalities. He added, “both men have cast themselves as ‘maximum leaders,’ strongmen defending the interests and honour of their nations. Neither wants to appear weak, which would seem to narrow the scope for compromise, but neither wants to be blamed for a complete breakdown in relations.” Unquote.

As the Washington Post piece informs, Trump and Xi met in April 2017 at the president’s Florida estate, Mar-a-Lago, and in Beijing in November 2017. After negotiations led by their subordinates ran aground, Trump telephoned Xi last month to reopen the dialogue.

And it is worth repeating that the trade conflict, which has rattled financial markets and upended global supply chains, began this year. Washington Post recalls how Trump imposed tariffs on $253 billion of imported Chinese steel, industrial products and consumer goods, including handbags, furniture and appliances.

Chinese officials, caught off guard by the aggressive U.S. moves, retaliated with import taxes on such American products as soybeans, automobiles and liquefied natural gas. Will there be a long term cease-fire between the adversaries? Don’t bet on it, just yet.

And there you have it. A deal that may just turn out to be no deal at all. And a trade agreement that is as mercurial as the temperament of the men who negotiated it. Perhaps, historians will look back at this time in incredulity and wonder at just how the world’s economic well-being ended up in the hands of such unpredictable leaders. That is all for now but do keep listening to Money Control podcasts for more updates as the story evolves.