The prospects of a US-China trade deal have been cast into uncertainty following the cancellation of the APEC summit in Chile. But that’s not the only thing hurting its chances.
Under the so-called “phase one” deal, which was meant to be discussed at APEC, the US would agree to suspend an upcoming tariff hike while China would buy US$50 billion in American agricultural goods. The deal wouldn’t remove any of the tariffs already imposed.
The “phase one” is extremely minor in scope, and does not encompass anything to do with IP theft – the problem upon which much of the trade war is contrived – or China’s efforts to become the high-quality goods manufacturer in the near future (Made in China 2025). But according to President Donald Trump – and let’s not put much stock in any sentence that starts that way – “phase one” deal will be “about 60 per cent of total deal” (sic).
Now, given that the deal wasn’t signed, and still hasn’t been, it’s impossible to determine exactly what its effects will be. But there’s no clear path to a “phase two”, and what started off as a supposedly economic dispute has rapidly taken on political dimensions that will substantially complicate matters.
Both President Trump and Xi Jinping stand to lose face if they back down on their conditions. Trump has tied his trade policy to the economic fate of what he believes to be his core constituents – farmers, miners, and factory workers. A deal that is perceived to reward China in some way, via the removal of tariffs or implementation of other favourable policies, could hurt the chances of Trump in 2020.
Meanwhile, heavy subsidisation of China’s state-owned enterprises has drawn America’s ire – but this policy is central to Made in China 2025, which (despite its name) is meant to ensure China’s manufacturing primacy into the middle of the century. It’s extremely doubtful Xi will agree to roll back this policy, unless he’s pushed – and it’s unclear whether the US has enough strength to make that push.
There is no scenario that is equally beneficial to both countries, at least in the long term. The US and China might strike a short-term deal that addresses some of the concerns in the dispute, but it’s unlikely this will be parlayed into long-term reform on either side.
China has continued its rapid consolidation of military and economic power throughout Asia and the rest of the world while the US has seen its own power stretched thin by foreign wars, increasing inequality, and social division. The idea that President Trump would abandon his protectionist rhetoric and policies within this context is ludicrous, and the fact the market rallies every time he tweets about the deal is telling. People are desperate for a break in the trade war, and they might just get one. But they shouldn’t expect it to last.
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