Is Trump Reigniting The Trade War
For decades, the US & China have fought deeply over foreign trade. As logistical and communication feats enabled globalization, the US trade deficit skyrocketed.
While the US is currently operating at a trade deficit with 100 countries, theirs with China is by far the largest, averaging $370 BILLION over the past 5 years. Every president since Bill Clinton has attempted to diminish the gap, however, the deficit continues to grow and new problems begin to arise.
How We Got Here
Amongst Trump’s many promises for his presidency, lowering the trade deficit has been his top concern.
As China’s production power grew over time, Chinese firms began to flood international markets with products, which led to price decreases for goods across the board. Countless American companies have accused Chinese firms of stealing intellectual property. There are numerous cases where spies were found stealing research and classified documents in attempts to bring them to China. Since the 1980s, before he was even an elected official, Trump has bashed American politicians for allowing the deficit to soar.
On March 8th, 2018, President Trump signed tariffs into law on imported solar panels/steel and aluminum for every country, including China, in “order to protect our national security.”
What began as a 25% tariff on $34 billion worth of products by both parties in July 2018, escalated into a tax war, with rates ranging from 10–30% on goods valued anywhere from $50 billion to $400 billion.
A Plan Was Hatched: Phase One
President Trump and Chinese leader Xi Jinping announced Phase One of a U.S.-Chinese trade deal in late December 2019, hoping to lessen the tensions between the two world superpowers.
The monumental agreement involves China purchasing $200 billion worth of US goods and services over the next two years, with additional spending in energy, manufactured goods, and agricultural goods. These combined would give an average annual total of about $400 billion, a number Trump has touted before.
The US would cut the tariff on a $120 billion list of Chinese goods in half, from 15% to 7.5%. The larger 25% tax placed on $200 billion Chinese goods remains, with talks of revisiting the value in Phase Two.
In return, the pact strengthens Chinese legal protections for patents, trademarks, copyrights (improved criminal and civil procedures to combat online infringement) pirated, and counterfeit goods. On top of this, US institutions will have expanded the use of Chinese financial markets for banking, insurance, and credit card ranking services.
The only way these measures are enforced are by the two parties involved. If a dispute arises, a bilateral consultation would begin looking at all things, from the working-level to the top officials.
Problems and Finding the Truth
Agriculture is one of America’s biggest industries, something it can actually use to combat the Chinese trade deficit. Phase One mandated China would increase spending on farm products, however, they’ve passed the duty to the Ministry of Agriculture and Rural Affairs. This move suggests the remaining $32 billion worth of agricultural goods is more of a bureaucratic task than a political one, worsening the relationship of the two countries. Not to mention a report (although disputed) came out on Monday that China asked state firms to halt purchases of U.S. soybeans and pork
New research found U.S. companies lost at least $1.7 trillion in the price of their stocks due to increased U.S. tariffs against imports from China, per the Federal Reserve Bank of New York. While Trump loves to measure his presidency by the performance of the market, the study showed 300 companies’ aggregate equity prices decreased by 6.0%.
China’s growing global market power worries the US and other nations. The Inter-Parliamentary Alliance on China was created by officials from eight countries to “construct appropriate and coordinated responses, and to help craft a proactive strategic approach on issues related to the People’s Republic of China.” Co-chairs of the group include US Senators Marco Rubio and Bob Menendez.
What Now?
It remains to be seen if Trump’s latest Twitter rants will remain just that, or if he’ll take action against China for Covid-19. Although the disease likely spread through accidental cross-contamination at a laboratory, Trump has remained on the offensive — frequently referring to the pandemic as a Chinese conspiracy.
As a result, Trump has threatened to break the recent gains in Phase One of the Trade Deal, claiming that China has already breached the US’s trust after this recent “attack”.
Fortunately, it appears that these words will remain on Twitter and Trump won’t be tearing up deals anytime soon.
Morgan Stanley says the US “will not want to break the phase one deal” with China because it will lead to more tariffs, and, in turn, damage the global economy. While Trump recently said he was “very torn” on canceling the deal, it is better for everyone to keep it alive. Not that Trump is caring about everyone, but by keeping the status quo with China, the stock market is allowed to push itself higher and the economy can recover.
It will be important to watch how China and the United States deal with non-trade related issues such as technology, the financial markets, and Beijing’s handling of the Coronavirus; expect volatility!
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