US-China talks bring down trade war risk: QNB

Progress in negotiations between the US and China has reduced the risk of further escalation of the trade war between the two countries. However, the complexity of Chinese industrial policy and disagreements over its future direction mean that a comprehensive deal remains unlikely.

During the course of last year, the Trump administration has already imposed tariffs on $250bn of imports from China. The tariff rate on $200bn of these goods is currently set at 10 percent, with the threatened increase to 25 percent having now been delayed twice to make room for continued bilateral negotiations. A 90 day cease fire was announced in early December, extended indefinitely on the 24th February, and we now expect a deal of some kind to be done in April.

The US has a strong negotiating position because it imports significantly more from China than China imports from the US . Indeed, the US has already threatened to impose tariffs on a further $267bn worth of Chinese imports.

The tariffs already imposed, and the threat of further escalation, are one of the main headwinds and risks facing the global economy. This is because tariffs force consumers to pay higher costs for imported goods, at least in the short term. Governments choose to impose tariffs because they want to protect local producers of goods from foreign competitors producing similar goods.

The delay in raising tariffs on imports from China suggests that the US believes a deal is now both possible and desirable. Trump’s statement pointed to substantial progress on “important structural issues including intellectual property protection, technology transfer, services, currency and many other issues”.

Detailed negotiations are being conducted by China’s Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. They have reportedly put together memorandums of understanding on: agriculture, currency, forced technology transfer and cybertheft, intellectual-property rights and non-tariff barriers to trade.

Agreement in some areas (agriculture and currency) is relatively easy and a common understanding has been reached. To help reduce the bilateral trade imbalance China has agreed to buy substantial amounts of agricultural products and energy from the US, notably LNG and soy beans. US concerns about a potential further weakening of the Chinese currency should not be a major obstacle as FX stability is in China’s own interest.

However, agreement in other areas is much harder to achieve. This is especially the case regarding China’s industrial policy, which the US argues involves: forced technology transfer and cybertheft, abuse of intellectual-property rights, and non-tariff barriers to trade.

In addition, the US believes that China’s subsidies and financing for state-owned enterprises continues to create an uneven playing field for foreign investors and the private sector.

China views industrial policy as a core part of its development strategy and is unlikely to cede ground easily. Made in China (MIC) 2025 is China’s strategic plan to move up the value chain. MIC 2025 focuses on high-tech fields including the pharmaceutical industry, automotive industry, aerospace industry, semiconductors, IT and robotics, with the intent to gain know-how via extensive state support.

Specifically, MIC 2025 sought to raise the domestic content of core components and materials to 40 percent by 2020 and 70 percent by 2025. China’s end goal is to be self-sufficient and to enable Chinese companies to better compete in global markets.

US Trade Representative Robert Lighthizer has insisted that the agreement must include enforcement provisions that would allow the US to impose tariffs or other sanctions if China doesn’t follow through on its promises. This means that a durable resolution and de-escalation of the trade conflict will remain dependent on political judgments of the US administration.

China has recently passed legislation to help prevent forced technology transfer and has promised to make further progress in this area, but that requires complex structural and institutional reforms.

Trump clearly wants a deal rather than escalation, saying on the 14th March that: “We’ll have news on China. Probably one way or the other, we’re going to know over the next three to four weeks”. China is also keen to do a deal, which would most likely be finalized and signed in a face to face meeting between the two Presidents in April.

It is therefore our base case that a deal gets done to take further escalation (threatened additional tariffs and increase in tariff rates) off the table for the foreseeable future, but residual issues mean existing tariffs will remain in place for a substantial period of time.

A deal and the increased likelihood of a more lasting agreement are clearly positive for international trade and business in both countries, as well as the global economy more generally. It reduces some of the uncertainty that has been hanging over international trade and investment.

Source from: The Peninsula