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CWA # 196, 31 December 2019

The World This Year
The US-China Trade Dispute in 2019: Towards a thaw in 2020?

  Harini Madhusudan

What happened?
Multiple rounds of negotiations between the US and China were observed in the past year, many of which came very close to a deal but failed. There was a visible difference between the negotiators and it was evident in the way they made statements after the meetings. The US-China trade dispute was the highlight of the G20 summit held in Osaka, June 2019. The Summit saw an agreement between Trump and Xi to restart the negotiations for the second time. Huawei technology became a centrepiece in the escalating trade dispute between the U.S. and China. It faced strong resistance in the U.S. And in May 2019, the U.S. announced entity list was announced which banned US Companies from selling without permission from the government. 

By August, the US accused China of currency manipulation. The claim was that the manipulation directly affected the U.S. dollar with the loosely pegged value of the yuan, to the dollar. In the same month, President Donald Trump ratcheted up tensions with its biggest agricultural trading partners. To this, China stepped away from U.S. farm imports stating that it does not wish to rule out more tariffs. The Chinese government asked its state-owned enterprises to suspend purchases of U.S. agricultural products. Chinese buyers turned to South American soybeans. 

Reports emerged in late November that the US and China have begun to consider a ‘Phase One’ deal. Mid-December 2019,  the United States and China announced an agreement to the first phase of a trade deal that would see some US tariffs be reduced or repealed, once signed by the parties. Phase one of the trade deal is expected to see some US tariffs on Chinese goods be reduced or repealed. This will be in exchange for China increasing its expenditure on US agricultural, manufactured, and energy products by at least $200 billion in the next two years. The tariffs against China for December will be completely rolled back as part of the deal. However, the lawyers are looking into the agreement and is expected to be signed in January. It might be too early to wish that the dispute as subsided. 

What is the background?
The trade dispute that started 18 months ago, moved from being a balance of trade issue to a strategic economic, currency and technology confrontation between the two large economic powers. As of data checked in November 2019, the US has imposed tariffs on US$550 billion worth of Chinese products and as a counter, China has imposed tariffs on US$185 billion worth of US goods. The US automobile industry has seen increased tariffs by China up to 40 per cent. They were seen suspending additional tariffs by 25 per cent as goodwill. Luxury cars were among the most affected, Tesla saw the largest impact. 

Technology, chipmakers and electronics manufacturers that depend on China for sales, for example, NVIDIA Corp, Micron Technology and Intel Corp are seen especially vulnerable. Semiconductor suppliers were at greater risk, Apple Inc was able to escape the tariffs on their China-assembled phones so far. This is likely to change if the dispute extends further. Meantime, there was also the episode with Huawei technologies and the overplay of the Intellectual Property argument. Since China is a major technology parts provider, the probability of them taking any measures in the technology domain would cripple industries. 

China is an important agriculture produce market for the US. The US exports soybeans to China and this took a hit in 2019 due to the tariff disputes. Other products exported in large amounts include cotton, hides and skins, pork and pork products, and coarse grains. Through the negotiation process, China was made to promise to buy more agricultural products. China began by increasing its purchase of soybeans. 

Negotiators from the side of the US and China, on 13 December 2019, announced that they reached a phase-one trade deal but provided very little detail on what exactly will be part of the agreement. US Trade Representative Robert Lighthizer is said to have brought a print-out of an 86-page agreement to the briefing with reporters as a “show-and-tell" to prove that it’s all written up and done. 

What does it mean?
The US-China trade dispute will be a major aspect of the election campaign in the U.S. for 2020. The divide within American politics can be seen in the campaigns of the candidates. Biden is on the free trade side; Trump and Warren are on the populist faction. The distortion to global trade and direct impact on economic slowdown from the US-China trade dispute will get worse in 2020. The larger impact will be seen on the economies that are dependent on the secondary outcome of the trade between the US and China. This has begun to reflect in the economies of the other economic powers, and it is set to get worse in the coming months.

For the longest time, it was seen as a ‘zero-sum’ game. But the past year has seen significant slow down in the economies. The escalation was a risk that the two nations took, knowing that neither of them is destined to win this ‘war.’ It is a game of ‘lose-lose,’ much less a zero-sum game. The best option for China would be to wait for the 2020 Presidential election results. 

There are high expectations that this deal could very well lead to the end of the current version of the trade dispute. But there are chances that the trade dispute may spiral into newer versions of economic confrontations. The second phase of the US-China ‘trade war’ would likely be about investment restrictions, export and import controls, and sanctions. 

Harini Madhusudan is a PhD Scholar with the School of Conflict and Security Studies. She can be contacted at harinimadhusudan@gmail.com

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