Struggle for The Deal
Remember the shaky relationship between Ross and Rachel that lasted throughout the 10 seasons of Friends and spanned most of our childhood? This is the perception of many who see the bickering between the Presidents of the U.S. and China on trade. While there is general optimism from analysts, investors and consumers, there is no clear indication that the two countries are headed towards an agreement.
Beginning at a campaign rally in June 2016, President Trump accused China of the “greatest job theft in history,” and initiated two executive orders to counter the unfair trading practices of our largest Asian trading partner. The main reasons for such a divide are because we have had a growing trade deficit and the Chinese government has seized American technology as the government seeks to boost its own technology industry. For years, the United States and China have had a rocky relationship but since President Trump took office, he made it his responsibility to construct a deal that will mutually benefit the two largest economies in the world. This goes without saying that neither nation can survive without the other; China relies on U.S. agriculture while the U.S. is dependent on the Asian country’s manufacturing and abundance of steel. Even more so, the global economy relies on the two largest trading partners and, therefore, has reciprocated with unpredictable fluctuations in markets around the world.
Last year, when the United States Administration added three levels of tariffs valued at $550 billion worth of Chinese goods, China counteracted by levying duties on $110 billion worth of American products. Just a couple of months ago, the White House decided as “a gesture of good will” to delay the increase from 25% to 30% in tariffs on $250 billion worth of goods, which was set to take effect on October 15. As a result, China mutually agreed to soften the burden by exempting pork and soybeans from additional tariffs.
Most recently, the two countries have agreed to “Phase One” of what claims to be a larger agreement. On October 11, China acquiesced to increase purchases on U.S. agriculture goods, while also coming to terms with new guidelines on intellectual property, financial services and currency management. As a result, the U.S. has postponed the tariff increases that were set to take effect on in the middle of October, leading markets in both countries to increase since the announcement. Throughout the prolonged negotiations, this has been the most significant step toward reaching a possible settlement and the countries remain optimistic that there will be a deal signed earlier than previously expected.
The back and forth between these countries is nothing new. This tit-for-tat has been going on for the last two years, commencing with U.S. inquiries into the Chinese telecom conglomerate Huawei and its tight-knit relationship with the Chinese regime. In May, Huawei and its counterpart ZTE Corp. were blacklisted from performing business with American companies and alluded to in a national emergency announcement issued by the White House. With cybersecurity threats on the rise, the Executive Order stated that the exchange of technology developed in adversarial countries can “create and exploit vulnerabilities in information and communications technology or services, with potentially catastrophic effects and thereby constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.” Technology has become the new driving force of countries and as the race to implement 5G intensifies, Chinese companies are seeking to become the global cartel for the new equipment.
The longer these two countries battle over trade, the greater the chance that other countries will look to jump into China’s 1.4 billion consumer market and attempt to replace the role of U.S. companies. As U.S. companies fear this possibility, Chinese companies are also on high alert not to lose 19% of the country’s exports that are transported to the U.S. Although trade has continuously grown between the U.S. and China over the last 40 years, it will be a heavy blow to both sides, if the countries cannot strike a deal.
Ultimately, as a result of the current tariffs and the fear of additional increases, major household names such as Google and Gap have relocated manufacturing operations to other countries such as Vietnam or Bangladesh. The next 12 months will be one of the most heightened periods of tension for President Trump, not just because he will be on the campaign trail, but he will need to secure a decades-long trade deal to garner support amongst Americans. Currently, China appears to view itself as the underdog with Chinese President Xi Jinping mentioning the word ‘douzheng,’ struggle, almost 60 times in a recent speech to members of the Communist party. As analysts hope that the 2020 U.S. election will encourage the two countries to move closer to a deal, for now, all eyes are on the two world leaders and the subtle hints they continue to drop.
Photo Caption: A deal yet to be reached
Photo Credit: Pixabay