Commentary: It’s only a pause for breath in US-China trade tensions

NEW YORK CITY: Is the Trump administration about to deliver a pre-Christmas present to China — and the markets? That is the US$360 billion question for investors.

During the last couple of years Washington and Beijing have waged an escalating war of words — and tariffs — as President Donald Trump has tried to reset the terms of US-China trade.



But on Thursday (Nov 7), Chinas state-owned television quoted government officials saying that the US-Chinese negotiators “would like to remove some of the additional tariffs in phases”.

This comes amid signs that a so-called “phase one” deal could soon be signed between Mr Trump and Xi Jinping, unwinding tariffs imposed on US$360 billion of Chinese imports, just before Americas crucial holiday shopping period.

Unsurprisingly, this has sparked pre-seasonal market joy.

READ: Commentary: Despite political fireworks, Trump and Xis underlying interests make a trade deal likely




But before investors get too jubilant, they should remember two caveats. First — and most obviously — American executives know that any phase one deal is unlikely to resolve crucial questions about the future US-China trade relationship.

The two sides have not, for example, created a truly credible enforcement system to police intellectual property rights. China has not acceded to US demands to reduce state involvement in industrial policy. And the issue of Huawei is unresolved.

“Its just a pause [in the fight],” Mohamed El-Erian, Allianzs chief economic adviser, told the Greenwich Forum on Wednesday, echoing the view of every American executive I have spoken to recently.

While China and the US say they are close to signing off on a mini trade deal next month, there are worries about the chances of them reaching a long-term agreement. (File photo: AFP/Anthony WALLACE)

READ: Commentary: The problem with a Phase One US-China trade deal

Strikingly, a recent survey by Panjiva, the trade analyst, shows that two-thirds of global companies expect the trade war to be rumbling on by the US presidential election in November 2020.


The second caveat is that these doubts about the “pause” mean that American companies are unlikely to halt their stealthy restructuring of supply chains. It is impossible to measure the scale of this shift with much precision, since trade data are woefully patchy.

Some companies which are using China-based production to serve local customers, such as General Motors, appear to be keeping much of their Chinese production in place.

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Others which are using Chinese production to serve the US market are also staying put, simply because it is too difficult to shift.

Brian Riley, head of Guardian Bikes, a US group that uses 40 Chinese vendors to produce bikes for America, says his company cannot relocate since “there is simply not enough manufacturing capacity” elsewhere.

The announcement that US companies could sell equipment to Huawei indicates a potentially softer position on a key sticking point in the US-China trade war. (Photo: AFP/Brendan Smialowski)

However, a survey earlier this year revealed that nearly 40 per cent of American companies in China plan to shift at least part of their production. This list includes Universal Electronics (maker of sensors), Go-Pro (maker of cameras), Steve Madden (fashion designer) and Hasbro (toy maker).

And the impact of this shift can be seen in the trade data. Although Chinese exports to the US fell last month, exports from Vietnam — a key destination for these relocation plans — jumped 21 per cent, year on year, in September.

Indeed, Nomura thinks that the boost to Vietnamese growth from the diversion of China-US trade is worth more than 7 per cent of its gross domestic product.


Could a trade deal affect this? Chinese officials hope so.

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