“The future depends on what we do in the present.” ~Mahatma Gandhi
Question: Can you explain the trade and tariff talks between the United States and China?
Answer: The United States and China are the two most influential economies in the world today. Trade bickering began on December 11, 2001 when China joined the World Trade Organization (WTO) opening its ability to trade globally.
China’s export success is known worldwide by virtue of the phrase “Made in China.” These exports created trade deficits with other countries meaning that the U.S. and many other countries import more than they export to China. China is ambitious and knows that continued growth is important. Slowed growth could bring political and social instability in a country with around one billion people.
China has tried to encourage consumption and urbanization. Other initiatives include the One Belt One Road (OBOR). On February 2, 2018 this column addressed the concept in the article titled “Makers, Takers and Stuff.” Here’s the link: coastalbreeze.demo.our-hometown.com/articles/makers-takers-and-stuff/
China wants to excel in all major technology, pharmaceutical and consumer sectors. These sectors rely on intellectual know-how rather than just a cheap labor force. The United States decided to levy new tariffs and other trade impediments trying to narrow the gap in the trade imbalance. The problem with this approach is that China is a big purchaser and holder of U.S. debt or Treasury Bills and Notes. Upsetting the Chinese too much could cause upset in this arena. Likewise, if China antagonizes us too much, they could face serious trade impediments.
For the time being, negotiations between U.S. and Chinese officials are geared to substantially reduce the U.S. trade imbalance with China. “The focus is on increasing exports from the U.S. to China of energy and agricultural products and to focus on cooperation of intellectual property protection. The most recent agreement calls for a delay in the implementation of tariffs and could delay the Treasury’s report on restriction on Chinese investments in certain industries and technology.”
Ironing out the specific details will be the challenge with the final outcome being a negotiated deal. One important point will be the Trump administration’s willingness to take actions to block Chinese companies from key U.S. technologies, which is a leverage technique if trade talks begin to break down.
These are potentially positive moves yet the final deal will tell the tale. A statement released late in May highlighted China’s willingness to “substantially reduce the trade deficit with the U.S. The Trump administration is targeting a reduction of $200 billion in the annual trade deficit which is currently at $335 billion.”
If China commits to increased energy purchases from the U.S., our infrastructure investment would likely increase, resulting in job creation. “Treasury Secretary Steven Mnuchin set an expectation of an increase between 35 and 40% in agricultural exports in 2018 and doubling energy purchases over the next three to five years. Talks will continue.”
Protection of intellectual property remains a key focus of the negotiations. Reports call for modification of laws and regulations by the Chinese, but specifics have not been announced.
“Congress is working to change the regulatory approval process for foreign investment in U.S. companies. The changes are clearly targeted at China and are concerned with transfers of critical technology and intellectual property. The issues are a concern for global markets. Uncertainty complicates trade negotiations.”
At different times different countries will likely have competitive advantages with labor, manufacturing, natural resources and education. Over the past two decades the internet has increased the power of globalization shifting competitive forces along the way. China and the U.S. are at the economic pinnacle of global trade and therefore in important discussions pertaining to these matters. Stay focused and plan accordingly.
Raymond James Research Department, “Trade Wars on Hold, for Now,” Ed Mills, Washington Policy Analyst.
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