The United States and China look like they have pulled back from the brink of a trade war as progress is made in talks aimed at bringing down America’s massive trade deficit with Beijing.
“We are putting the trade war on hold,” US Treasury Secretary Steven Mnuchin told the media after the talks on Sunday, May 20.
Beijing agreed in a joint statement with the US to ‘substantially reduce’ America’s trade deficit with China, but did not commit to cut the gap by any specific amount. The Trump administration had sought to slash the deficit by $200 billion. Recent talks between high-level US and Chinese trade delegation had ended in stalemate, and there are still serious concerns that global supply chains could be fractured unless further rounds of talks bear fruit. As global trade relationships potentially start to unravel, some international companies had earmarked relocation to overcome any up-and-coming trading hurdles.
The promising rapprochement between the US and North Korea has recently hit a few hurdles which puts a new peace deal in doubt. Commentators are also warning that there will many major issues to iron out before there is a successful conclusion to the current Sino-American trade talks. For instance, a list of demands laid down by the US and China of each other, published by Bloomberg, clearly highlighted these differences.
Here’s just a selection of these demands:
A recent editorial in the UK’s Financial Times pulled no punches when considering some of the American demands in its negotiating strategy. The opinion column stated “it would be hard to come up with a more economically wrong-headed, diplomatically toxic and legally destructive negotiating position”. Of those complaints against China that have been taken to the World Trade Organisation (WTO), the editorial suggested the country had a good record of implementing any decisions made against it.
There is much speculation about how the talks will progress, once they reconvene, but there is also an underlying concern that there could be severe disruptions to global trade.
Recent analysis in The Economist used research from Resilinc, and showed that certain industrial sectors would be subject to high “collateral damage” due to the $50bn of proposed Chinese tariffs. The research based the severity of impact on two criteria: the level of dependence of the product on the Chinese market, more specifically, its ability to source from or sell to another country; and secondly, the impact of the proposed tariffs on revenue or costs. Research suggested the most severely affected sectors would be, aerospace, soybeans, sorghum and cars, among others. The least affected sectors would be diodes and LEDs.
Trade tensions have undoubtedly disrupted agricultural supply chains. The South China Morning Post reported that Mexican corn buyers are turning to Brazil for their grain, and that vessels transporting sorghum to China were forced to turn back after China slapped down trade-restricting tariffs.
The Economist pointed out that some sectors in the US are already facing higher input costs due to the already imposed steel and aluminium tariffs. Based on a report by the Institute of Supply and Management published at the start of May, the research draws attention to manufacturers that are eliminating some inputs due to the higher raw material costs.
It may, therefore, come as a relief to many US manufacturers that Canada, Mexico and the European Union have received a 30-day exemption to proposed steel and aluminium tariffs that were due to commence May 1, as reported by Supply Chain Dive. Permanent exemptions have been granted to Brazil, Argentina and Australia, and the Trump administration aims to get better deals with other countries through extension of negotiations.
According to The Economist, intensive research by various firms and consultancies could not put a figure on the effect of Trump’s trade policies and American firms’ exposure to supply chain risk. However, if trade barriers start to become a reality “there is little doubt that supply chains and the geography of production will shift”. Fiat Chrysler Automobile has already communicated its intentions to shift assembly of pick-up trucks from Mexico to the US, to side-step any potential exit from the North American Free Trade Agreement (NAFTA).
One recent development is that China recorded its first current account (goods and services) deficit in 17 years during the first three months of 2018, as reported by The South China Morning Post. An economist with Standard Chartered in Hong Kong suggested China’s trade is vulnerable to a “moderate shock”. However, the merchandise trade remained in surplus during the first quarter, and the bilateral trade gap between the US and China peaked to a record high in 2017.
Niall Ferguson and Xiang Xu, both senior research fellows at the Hoover Institute, Stanford University, implored China to take measures to reduce this enormous trade deficit, as expressed in an Opinion piece for The Wall Street Journal.
It appears that both Ferguson’s and Xu’s words of warning have been heeded as China and the US look to narrow the trade gap between the two countries.