A Little Relief?
By: Dr. M. Ray Perryman
Published in syndication December 05, 2018
When I decided on this topic, President Trump and Chinese President Xi Jinping had evidently reached an agreement in principle to ratchet down the tensions between the US and China and work toward solving trade-related problems. Fears of a full-out trade war (or worse) were abated somewhat as the two sat down at the G-20 meeting and started a dialogue about getting to a deal. By the time that I actually put pen to paper (yes, I still do that), tweets and conflicting accounts of the discussions had markets taking an 800-point nosedive. Here is the state of play (I think).
President Trump has said the US won't raise current tariffs on Chinese goods from 10% to 25%, which was scheduled to happen on January 1. In return, China agreed to buy more US agricultural products, work to reduce the North Korean nuclear threat, and endeavor to stem exports of the addictive and dangerous opioid fentanyl. Although the truce is at best temporary (only 90 days), it provides some breathing room for further negotiations.
Tariffs are only part of the complex relationship. Structural issues such as protecting US intellectual property and opening Chinese markets will likely be more difficult to solve but have much greater potential effects. There are also non-tariff barriers such as delays, lengthy border inspections, and obstacles for companies doing business in China.
For the US, ending the practice of requiring American companies to share technologies as a condition of selling products into China is a top agenda item. Technology sharing often occurs through joint-venture partnerships, and at times a Chinese firm that was once a partner becomes a competitor and intellectual property rights are ignored. Intellectual property protections for everything from digital movies to medications could be improved, and the US will push for better enforcement. Cybersecurity is another issue, with the US asking China to enforce agreements already in place that keep Chinese agencies from hacking US firms. Cracking down on cybertheft will be discussed, as will government support for Chinese state-owned firms.
For China, economic slowing has been adding to pressure for a deal. Tariffs have been hitting Chinese companies hard, and the rate of growth has slowed markedly. Fears that American companies could begin to pull out of China are also beginning to surface, and problems have been emerging in Chinese corporate bonds.
Both nations have strong incentives to reach an agreement. Tariffs are already harming affected industries in the US and China, consumers have been negatively affected, and economic performance has suffered. Moreover, fundamental shifts which would do even more harm are almost inevitable without an agreement. Let's hope the truce holds and progress is forthcoming.