SINGAPORE (Mar 4): An escalation in trade tensions between the US and China was averted again, though both countries have yet to reach a resolution on trade and other issues despite several rounds of negotiations. The 90-day truce on the trade war between the two countries ends on March 1.
On Feb 24, US President Donald Trump said in a Twitter posting that he would delay the increase in tariff rate to 25% from the current 10% imposed on US$200 billion ($269.6 billion) worth of Chinese imports. No details were provided as to how long the tariff deadline would be extended. Trump also tweeted that a planned summit would be arranged to conclude an agreement with Chinese President Xi Jinping at the Mar-a-Lago resort in Florida.
So far, both countries appeared to be making progress to seal a deal eventually. “I am pleased to report that the US has made substantial progress in our trade talks with China on important structural issues, including intellectual property protection, technology transfer, agriculture, services, currency and many other issues,” Trump tweeted.
China’s Xinhua News Agency reported that the seventh round of negotiations was a significant step towards achieving mutually beneficial agreement, with growing consensus and narrowing differences between both sides.
Market observers, however, are not entirely convinced. Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management, says the emerging “shape” and “tone” of the negotiations do not portend a resolution of many pending issues per se. “Strictly speaking, the trade relationship is not about to revert to an ex-ante status. Far from it. But things will not get worse,” he writes in a Feb 26 note.
While China has agreed to make concessions, such as buying more agricultural, energy and manufactured products from the US, the other more pressing issues will require lengthy negotiations. This includes intellectual property rights, forced technology transfer, cyber theft and the related enforcement mechanism, which are more challenging to reach an agreement, says JPMorgan. Moreover, issues surrounding China’s subsidies, industrial policy and state-owned enterprises are not part of the current negotiations, the bank adds.
JPMorgan says it is adopting a “cautious” stance on the relationship between the US and China in the medium to long term. It points out that the trade friction between both countries is just the start of a changing bilateral relationship that will reshape the global economic and geopolitical landscape in the coming decades.
For one, a ban on technology transfers and cross-border investment is likely to increase ahead. ZTE Corp and Huawei Technologies are indicative cases of the challenges ahead, warns JPMorgan. Secondly, the global supply chain could be increasingly disrupted as technology manufacturers relocate out of China if trade tensions worsen. This is on top of rising production costs, which have already led to the relocation of low-end manufacturing from China before the trade tensions erupted, warns JPMorgan.
Furthermore, the impact of non-tariff actions could be equally damaging to the economy and financial markets, says JPMorgan. It will also be more challenging for China to upgrade its manufacturing and service sectors and achieve sustainable growth in the long term.
So far, there is little change in the path of domestic economic activity in China as growth continues to slow gradually, according to S&P Global Ratings. Policy easing in China appears to be gaining traction, based on the pickup in credit in January, it says. Financial conditions are now moderately positive, which, if sustained, would be consistent with some levelling-off in growth by mid-2019, it adds.
“For now, policy easing does not appear to be enough to fully offset ongoing moderation across other growth drivers, including real estate and manufacturing investment,” says Shaun Roache, S&P Global Ratings’ Asia-Pacific chief economist. “While moderate easing is likely to continue, substantial easing is unlikely unless labour market conditions deteriorate.”
