Analysis: US-China Trade War, Trump is in no-haste!

President Trump and Xi Jinping pictured walking away from each other at Osaka Summit, aptly describes the current state of US-China Trade War

US President Donald Trump’s announcement that reaching a deal with China is not a priority ahead of the 2020 presidential election, has made the stock markets recede in apprehension. He has claimed that the dispute will not undermine his chances to get re-elected. Trump has made it clear that his goal is a “complete deal” with China and he is not interested in “a partial deal”.

A reportedly ‘productive’ meeting was recently held between Chinese and US officials where the US focused on the agriculture sector and asked China to increase its imports of soyabeans and other associated products from the sector. China on the other hand has recently been increasing imports of soybeans and other agricultural products from Russia instead, as Beijing tries to diversify supplies away from the US under the expanding trade war. The move has been considered by many to be a painful blow to Trump, as his key electorate i.e. farmers, have already been struggling to cope with declining prices and sales of crops. However, yet another pledge from Beijing to buy more soybeans from US now as a result of recent meeting between the two, is unlikely to prove sufficient to reach a deal, as the problems are even deep rooted.

According to the experts, US actually expects China to address other critical issues like reported intellectual property theft, barriers to entry for foreign companies and generous subsidies for state companies and more transparency in business deals and investment packages. For this the experts believe that China would have to change its economic model, something that Beijing is not prepared to do, as it is the Beijing’s economic model which has facilitated ease of doing business and kick-off of huge projects like BRI, around the world.

US-China widening trade imbalance since last two decades

The US has been increasingly wary of China’s growing hegemony over this decade. While US was busy invading Afghanistan and Iraq and fighting pointless wars over the horizon, China was reneweingconsolidating its economic foothold on the world. Since the entry of China in WTO in 2001, the trade deficit between US and China continued to widen and the 2018 US trade deficit with China stood at over $400bn. Therefore, in a desperate attempt to strangle China, the mercurial US administration under President Trump in July 2018 slapped $34bn of Chinese goods with tariffs thus starting a trade war between US and China. The US imports from China amounted to around $540bn in 2018 out of which US has already burdened $400bn of imports from China with 25% tariffs by September 2019. Beijing hit back with increased tariffs on more than 5,000 American products worth $60 billion. In addition, Beijing, has further warned to impose additional tariffs on American goods and restrictions on key exports such as rare earth materials, which are critical for the US. Russian on the other hand has already offered that it is ready to replace US exports to China. China can switch to the Russian market to replace American products amid the ongoing trade war with Washington. Russia and China have plans to double trade turnover in the next few years. In 2018, the trade turnover between Russia and China enjoyed historic growth of nearly 25 percent, reaching $108 billion.

Chronology of the US-China Trade War

This unpredictability of US President Donald Trump’s decisions is what the SCF believes have recently kept strongest of the US allies from taking part in any coalition against Iran in the Persian Gulf, disapproving the US pull out from North Syria, siding with Pyongyang or Washington in ongoing US-North Korea denuclearisation talks, and so far from accepting the placement of Intermediate range US missiles after US recently abandoned the INF treaty. Not surprisingly, this is not the first time Donald Trump has taken a complete U-turn on state policies recently, as imposing of new tariffs by US in US-China Trade war starting in 2018, unilaterally scrapping the Iran nuclear deal, lecturing its EU partner on trade, forcing Canada and Germany to make new trade deals with US and now pulling out US troops from North Syria in the same year are other stark examples plunging the whole world in new conflicts at new frontiers.

Experts are highly pessimistic of the world’s economic outlook now due to the ongoing trade war between the two giants and fear yet another recession next year, the biggest after 2009. As in, if Chinese consumers have less money to spend – because they’re paying higher prices on US imports – they’ll have less disposable income to come on holidays or to send their children here for university. Lower consumption and economic activity in China could also mean less demand for Australian mineral exports. If other countries retaliate by erecting their own trade barriers, protect them from the dumping of cheap Chinese and American goods, this could lead to a sudden seizing up of global trade. Thousands of jobs are lost, and real incomes take a hit.

However, Trump’s positive assessment of the US economy is one of the reasons why he does not seem to be under pressure to get a deal. Trump’s chief economic adviser Kudlow remains optimistic about the prospects for the US economy. The S&P 500 Index – one of the key barometers for Trump – continues to trade close to the all-time high. Perhaps if there is a “major” sell-off in excess of at least 10%, Trump may adopt a different approach.

US China Trade War- The Tariff hike by US on Chinese goods

On the other hand, claiming on the face of it that US is not under pressure to get a deal and it is China which is under pressure, Trump recently subsided under pressure from US companies which warned that such levies would cause economic issues, and excluded a wide range of products from tariffs. The US administration has also embarked on a massive fiscal stimulus package, including tax cuts, which is buoying the world’s biggest economy. US consumers and businesses will no doubt pay higher prices on imports from China, but it’s unlikely they’ll stop buying them altogether.

However, it remains true that a widespread global movement to reject free trade and return to a system of mercantilism would have a devastating effect on the global and local economy. Donald Trump has proved himself much closer to desiring such a world than any reasonable person could have imagined. Chinese Vice Premier Liu He plans to visit Washington to meet US Trade Representative Lighthizer and Treasury Secretary Mnuchin for high level negotiations. All eyes of hope are glued to that visit.

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