China and the US have agreed to resume the trade talks that have been halted since May as the US decided to hold off on a new round of tariffs and scaled back restrictions on Huawei. The Huawei move can be seen as critical, signaling President Donald Trump’s distance from hardliners in his administration. It increases the chance of a trade deal being completed in coming months. This, in turn, may erode a key support, namely tariffs, for the USD.
Trade deal sticking points
The longer-run conflict between China and the US over technology will likely continue. In the short term, the two key obstacles to reaching a temporary agreement are:
- China’s demand for scrapping all tariffs, which the US is resisting
- the US’s insistence on China enshrining its commitments in law, which Beijing sees as an infringement on its sovereign power.
But to us, they seem resolvable.
Tariffs: There is a possible win-win compromise. The US can scrap the tariffs on USD 200 billion of general Chinese imports that it imposed in September 2018 and keep only the 25% tariff on USD 50 billion of high-tech Chinese imports imposed last July. This would enable Beijing to claim victory and still allow Washington to assert that it is fighting back against Chinese tech producers that benefit from China’s subsidies and forced technology transfer policy.
Chinese laws: The US request for changes in China’s laws on intellectual property protection has partially been met by the new Foreign Investment Law passed this March and there have also been many changes in recent months in Chinese IP-related laws and regulations to improve protection for foreign IP, increase penalties on Chinese IP theft and narrow the scope for forced technology transfer.
For sure, more actions by Beijing will be needed. But as long as the expected trade agreement could be worded skillfully to allow President Xi to claim the new regulations are needed for China’s development, without caving in to US pressure, a compromise seems possible.
The Huawei issue is tough to crack, and US Congress is putting up a fierce fight against any deal to resolve it. Mr. Trump acknowledged at his G20 meeting with Mr. Xi that the “Huawei issue is very complicated” and they were “leaving Huawei towards the end”.
Nevertheless, allowing US companies to sell to Huawei provided that the sales are not harmful to US national security is a good start for negotiations. From this perspective, the G20 meeting outcome was slighter better than expected: the compromise on Huawei should be modestly positive for both China and US growth.
All this suggests that a temporary trade deal may be on the horizon, and the purpose of the deal, in my view, is to set the stage for further negotiations on deep-rooted issues related to Sino-US high-tech competition. Despite this short-term improvement in sentiment, the China-US “tech cold war’ is likely to get colder because the trade war is only a manifestation of economic and political ideological differences that have threatened the national security of the two countries.
The truce will only change the trade war impact from the macro level in terms of market volatility to the micro level in the technology sector. It provides temporary relief to the markets, but does not end the war for economic and technological dominance.¹
¹ See “Chi Flash: Sino-US Trade War: Truce For Now But Risks Have Mutated”, 4 December 2018
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