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The US-China trade deal: relief, for now

1/17/2020

The phase 1 trade deal signed between the US and China brings an end, at least for the time being, to several years of rising tensions.

William DE VIJLDER

TRANSCRIPT // The US-China trade deal: relief, for now : January 2020

Part 1

Rising tensions inflict economic damage

The trade deal between the US and China signed this week brings an end, at least for the time being, to three and a half years of rising tensions. During the election campaign in June 2016, Donald Trump had presented plans to counter, what he called, unfair trade practices by China. The first US tariff hikes occurred in January 2018, but they were not targeting specifically China. The first ‘China only’ hikes intervened in the spring of 2018, leading to Chinese retaliation in the following months.

After the truce concluded in December 2018 in Buenos Aires, trade talks broke down in May last years, leading to more tariff hikes which created havoc in financial markets in August. Eventually, a phase 1 deal was announced in December last year.

Two years of reciprocal tariff increases have caused the average tariff on Chinese exports to the US to increase from 3.1% to 21% and on US exports to China from 8.0% to 21.1%. It had major repercussions on bilateral trade, causing a big drop in Chinese exports to the US. It also led to trade diversion and forced companies to reorganise their value chains. According to a recent study by the Federal Reserve, “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.”

To put it differently: a tariff war is a bad idea.

A deal at last

It took a lot of time but eventually an 86 pages trade deal has been signed. China has committed to buy an additional $200 billion of U.S. goods over two years: manufactured goods (including aircraft, autos and car parts, agricultural machinery and medical devices), energy, agricultural purchases, services. China will open its financial services sector more widely to U.S. firms. It has committed not to use its currency to influence trade flows. In return, the US cancelled planned tariff hikes and will also reduce halve the tariff rate to 7.5% on about USD 120 billion of Chinese goods.

The deal is enforceable, based on a dispute resolution process, which enhances its credibility. It’s a phase 1 deal, which means there is still a lot to be discussed in a second phase, think of  intellectual property rights or subsidies for state-owned enterprises.

Part 3

What’s next?

Very recently, the United States, the European Union and Japan have proposed new global trade rules to curb subsidies, in particular to public sector companies. They consider that these subsidies are distorting trade. They will submit the proposal to the WTO and try to get the support from the WTO members. China is clear target.

President Trump has said he could wait to get a phase 2 deal with China until after 2020 election. He thinks he could get a better deal if he waits until after November.  

To put it differently: the attitude adopted in the negotiations can be tougher after the elections than before. It implies that, depending on the election outcome, trade war fears may very well again be front-page news at the end of this year.

Thank you for watching EcoTV Week and I invite you to join us again next week.

 

 

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