Two of the world’s largest economies have been engaged in a bitter economic feud for the past two years. Washington has been setting increasingly harsh trade barriers on Beijing in order to economically coerce China into stopping unfair trade practices. According to the Congressional Budget Office, increased tariffs have resulted in a reduction of real (inflation-adjusted) GDP by 0.3% by 2020, real consumption by 0.3%, real private investment by 1.3% and real household income by US$580 (in 2019 dollars) in the U.S.. In addition, the Wall Street Journal reported that stock markets in the U.S. responded with sharp declines after economic data revealed a downward trend in Chinese exports to the U.S. in 2019. The Dow Jones Industrial Average lost 0.4%, the S&P 500 dropped 0.3% and the Nasdaq Composite slid 0.4%. The trade war also had a detrimental impact on the Chinese economy, the Federal Reserve estimates that the Chinese economy has taken a 0.25% hit as U.S. demand for Chinese goods reduced by a third. All in all, soured trade relations between the two economic giants had experts predicting an elevated risk of a global recession, according to CNBC. Ultimately, all this culminated in Washington and Beijing signing a new trade deal in January 2020, easing tensions between the two countries.
From the perspective of the U.S., the new trade deal intends on opening up Chinese markets to more American companies, reported The New York Times. In particular, farm and energy exports from the U.S. will increase. In addition, Beijing has also committed to buying U.S. $200 billion worth of addition goods from the U.S. by 2021, while reducing some of the tariffs it has imposed on American exports. The commitment of buying an additional US$200 billion by China all but guarantees an export stimulus for American firms, which is beneficial for the U.S. economy.
“One of the greatest trade deals ever made! Also good for China and our long-term relationship.” Tweeted President Trump as the new trade deal was signed.
From the perspective of China, President Xi Jinping can claim through this new trade deal that he did not bow to mounting American pressure. The respite this deal will provide for Chinese firms will also extend to the Chinese economy, which is beneficial for both President Xi and China as a whole. In addition, easing tensions between Washington and Beijing will also help slow down the outflow of US demand to other countries such as Taiwan, Vietnam and Mexico, according to BBC. However, most of these new arrangements are likely to remain, despite the new trade deal.
President Xi stated in a message conveyed to President Trump that the deal is “beneficial to both China, the U.S. – and the world.”
Critics claim that while the new trade deal is a step in the right direction, there are still many issues unaddressed in phase one. BBC reported that phase one does not address industrial subsidies that China has pledged under its ‘Made in China 2025’ commitment. Directly threatening American supremacy in the technology sector, Beijing has vowed to subsidise domestic firms to help them become world-class leaders in emerging technologies. While phase one does talk about opening up market access for American financial services firms, BBC reports that China is not giving up much in the negotiations by doing this. The Chinese financial services sector is already dominated by domestic players, making it more difficult for US firms to compete in the market. In addition, phase one also does not mention when the tariffs that are still in place will go down. According to the BBC, the tariffs are still six times higher than pre-trade war levels, implying that consumers are still paying more. Finally, phase one also fails to mention how it intends on monitoring enforcement of the conditions in the new trade deal. According to the BBC, the trade deal required China to begin consultations with America once a complaint has been made. However, according to the BBC, American firms do not like to report intellectual property theft. Therefore, there is a possibility that although there is an agreement in place, Beijing may just ignore it.
All in all, although the trade deal does provide temporary relief to Chinese and American firms, many issues in US-China relations remain unaddressed. While the intensity of the trade war has decreased with phase one, the economic conflict is still in place until phase two of this deal hopefully addresses the aforementioned issues.
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