US-China trade war's clash of capitalist cultures

‘Phase one’ trade deal is a start, but leaves major frictions unresolved

THE trade agreement, signed last week by the US and China, puts a pause on what is essentially a clash of capitalist cultures – one corporate-led and neo-liberal, the other state-led and more nationally oriented – both currently delivering widening wealth gaps, though in China’s case after broad income rises over the last 30 years.

Both countries are adherents of global trade, both are members of the World Trade Organization (WTO), both economies are fueled by generous stock valuations and debt, but the two have often conflicting views on issues, such as currency, cyber-technology, protectionism and intellectual property rights.

At the agreement’s signing, US President Donald Trump described the 86-page trade deal as “remarkable”, “historic” and “a momentous step with China towards future and fair trade”, while Chinese Vice Premier Liu He characterized the deal, in more muted tones, via a translated message from Chinese President Xi Jinping, as “good for China, the US and the world”.

China's model of economic development suits its national reality

At the signing, Liu also stated, along with notes on co-operation, shared common interests and opening up, that “China has developed a political system and a model of economic development that suits its national reality”, perhaps hinting at the limits of its pliability.

US-China trade tensions, their resulting tariffs and accompanying rhetoric, accusations and even diplomatic manoeuvrings by both parties have riled markets, dragged down Chinese and global GDP, and upset international supply chains.

In Asia, in addition to the general effects of the lower GDPs, the most striking effect of the trade war has been on export manufacturers. The trade tensions have caused or, at least, accelerated the pace of foreign manufacturers inside China fleeing increasing costs and regulations to set up shop elsewhere in Asia, such as Vietnam, Bangladesh and other emerging markets.

Most of the deal’s benefits touted by Trump – Chinese promises of US$200 billion worth of energy, manufactured goods, services and agricultural purchases, and a commitment to not manipulate its currency – will not directly affect the rest of Asia. Nor will the US administration’s recent announcement of the cancellation of its next round of proposed tariffs, as the majority of those already in place on US$369 billion worth of Chinese products will remain.

Assuredly, business leaders and markets will be assuaged by the easing of tensions and the implied spirit of co-operation. But, other than the trade imbalance and currency manipulation accusations, somewhat addressed in the deal, major contentious issues between the two economic powers were left unanswered.

The current US administration objects to Chinese state subsidies, accuses China of commercial and technical cybertheft, wants it to open up its financial sector, and blames it for the loss of its manufacturing base - issues which the US president often vents on, and which helped spur his 2016 presidential campaign.

“[But] from a Chinese perspective, Beijing believes that they have done enough to accelerate the opening-up of its financial sector, protect intellectual property and limit technological transfer,” says Chi Lo, senior economist at BNP Paribas. “Any major changes [to the agreement on these issues] will depend on further trade negotiations and Beijing’s decision on the pace of structural reforms, something that external forces can’t push.”

Beijing vows not to commit Japanese mistake in trade war 

On the contentious issue of currency manipulation, and specifically market talk of future negotiations involving a currency pact between the two countries aimed at strengthening the renminbi, Lo feels such a possibility is unlikely.

Such a pact would be similar to the 1985 Plaza Accord, which Japan signed after yielding to pressure to strengthen the yen and address the US trade deficit with the then world’s number two economy, Lo explains. As a result of the accord, the yen surged, prompting Bank of Japan countermeasures to increase liquidity and offset resulting damage to exporters. This led to an asset bubble that burst in the early 1990s and two decades of economic stagnation.

“Beijing has vowed that it would not repeat the mistake,” Lo points out. “China’s economy is in a stronger position [than Japan’s was] to resist any US pressure to enter such an agreement.”

The deal is good news for global trade, which took a US$420 billion hit in lost export revenue in 2019 from the tariff war, says Kerstin Braun, president of Stenn Group. “But while it’s a start, the deal fails to cover the significant issues that prompted the war in the first place – China’s preferential support of state-owned enterprises and the technology transfer from American companies doing business there.”

“Both sides need to accept the larger picture,” she adds. “For the US, it’s that China as an economic power isn’t going away, and, for China, it’s that to be in the world marketplace means complying with international business standards.”

However, with a weakened WTO and a general trend away from multilateral agreements, Braun sees more trade squabbles on the horizon. “China is showing it can be less dependent on the US. Its exports grew slightly last year overall, while exports to the US dropped 12.5%.”

The deal, says Michael Taylor, Moody’s Investor Services’ managing director, credit strategy & standards, will reduce the risk of renewed escalation of the trade dispute and could help boost bilateral exports, business confidence and investments. “But the details of the agreement suggest considerable scope for friction between the two sides, and Moody’s expects tensions between China and the US to wax and wane in the years ahead.”

“Over the next few months, enforcement of the deal will be important to track – particularly US exports to China and movement of the yuan,” notes Nupur Gupta, Eastspring Investment’s portfolio manager, investment solutions, adding that “phase two” negotiations and potential tariff rollbacks will depend on it.

Reactions to the “phase one” deal from commentators varied from vociferously negative to cautiously positive. But whatever the opinions expressed, the belligerents in this trade war appear to have signed a truce. The question is how long can it hold when you have two powerful nations not adverse to throwing their economic weight around, a US presidential election looming, China’s GDP growth slowing, and major frictions unresolved.

Date

21 Jan 2020

Channel

Treasury

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