The global markets appeared enthused about the imminent trade deal between the US and China. As of now, Trump has approved the trade deal but China has not yet committed itself to that deal. It will be a full-fledged trade deal only after China accepts and endorses the deal. What are the contours of the deal and what could be the road ahead?
Contours of the trade deal
While the complete contours of the trade deal are not yet made public, there are some indications of what could be contained in the trade deal. To begin with, the deal will gloss over some of the delicate issues of data security, intellectual properties, Chinese state subsidies etc. It will also not touch upon the role played by Huawei or even the future of the US companies that are currently operating out of China. One thing the US has assured is that the December 15 tariffs are off the table for now. Regarding the previous tariffs that became effective from March 2018, the US has committed to reduce the median tariffs in a phased manner from 25% to 12.5%. However, this will be subject to China also reciprocating by doubling their agri and other imports from the US. The US has also clarified that the sustenance of the trade deal would be contingent upon China honoring its side of the agreement. Sentimentally, this looks to be positive but there is many a slip between the cup and the lip. Here is how the US and China stack up.
Trump needs a deal
If you look at it objectively, Trump is actually desperate to have a deal. He is under pressure in the US on two counts. Firstly, there is an impeachment motion against him in progress and he will need every ounce of goodwill that he can muster. A US-centric trade deal will help Trump sell the story that he could bargain and play hard ball with China. That is likely to be a big positive ahead of elections in 2020. Secondly, the US mid-west, where farmers voted for Trump in large numbers, has been the worst hit by the higher tariffs. Input costs have gone up but Chinese demand for their products has not picked up. A deal in time would surely help Trump.
China will be a tough customer
One thing Trump needs to realize is that striking a trade deal with China will not be as simple as Canada and Mexico. China is much more powerful; politically and economically. China has insisted on total unwinding of all tariff hikes post March 2018 as a necessary condition to a trade deal. They are unlikely to commit doubling of imports from the US without a total unwinding of incremental tariffs. That is why China has not shown the same enthusiasm about the Phase 1 trade deal as the US. Trump may have to pay a price if he wants the Chinese to reciprocate. That is; if Donald Trump really wants the Trade Deal in place before his re-election campaign! ©