Tension lingers even after US-China talks ease trade war fears

Wall Street Investors who were divided in their opinion on the merits of the trade sanctions imposed by President Trump against China a couple of months ago are relieved a lot this week after a potential trade war was ‘put on hold’ through bilateral negotiations, at least for now.

Markets were quick to respond to the positive gesture, with the S&P 500 Industrials gaining 1.5% and Dow Jones crossing the 25,000-mark after markets opened this week. It was a similar scenario in Europe, where the FTSE 100 benchmark index of London and the Frankfurt and Paris stock exchanges opened notably higher.

Cloud clears

The truce has once again opened the doors to free trade between the world’s largest economies, but it is too early to rejoice as the underlying tension is still simmering. What keeps the pot boiling is China’s refusal to slash its trade deficit with the US by $200 billion – a demand by Trump which many experts believe is impractical.

Meanwhile, it would be a wise idea for the US government to end the dispute for good considering its political ramifications, for China will not hesitate to target industries that are closely linked to Trump and the Republican Party.

A closer look at the current state of affairs unveils the big picture, that Trump’s interest in East Asia is not limited to China at the moment. The regional agenda of the POTUS revolves around North Korea, and the success of his forthcoming meeting with North Korean leader Kim Jong Un depends a lot on China’s cooperation.

A deep-rooted issue

Some of the key issues were not discussed at last week’s US-China meeting, leaving room for a possible re-escalation of the conflict. Moreover, it is prudent to assume that China would keep on putting pressure on Washington to share technology in return for opening the Chinese market for US products. In that case, a possible digital invasion by the Chinese would put US intellectual property rights at stake.

And, that’s the point where the cycle of events starts afresh – new sanctions by Washington to safeguard its technology, curbs on investments and export regulations. As far as the stakeholders of the US-China bilateral ties are concerned, the need of the hour is a revision of the basic framework.

Meanwhile, by relaxing his stance on China, Trump has disappointed those who supported his ‘America first’ campaign. A section of the pro-protectionist group believes it is a climb-down for the country, which might not gain anything significant from the new deal with China.

On the other side, Beijing’s commitment to cut the trade deficit substantially by diverting purchase of commodities to the US, primarily agricultural products and energy, could have a heavy impact on local suppliers. Beijing’s other key trade partners like Brazil (soybeans) and Australia (beef) will also feel the heat of the agreement with the US.

A planned move

When the Trump administration slapped tariffs on the import of steel and aluminium on March 1, initially exempting Canada and Mexico, it was apparent that his ultimate target was China and its growing clout on the US market. Though Trump signed the tariffs into effect in the following days, it was only after three weeks that he took on Beijing directly by imposing tariffs of $60 billion on imports.

Clouds of a potential trade war shrouded both the countries in early April when China retaliated by imposing tariffs on the import of as many as 128 US product categories, triggering a stock market crash. What followed was a series of tit-for-tat announcements by Washington and Beijing detailing the specifics of the sanctions they proposed to slap on each other.

Things took a nasty turn when the Trump administration responded to the Chinese retaliation with a proposal for additional tariffs of $100 billion, further escalating the economic warfare. Trump justified his action saying China deserved such a punishment for infringing upon important US intellectual property rights.

ZTE – a pawn in trade standoff

When it appeared the dust was slowly settling, the government fired a fresh salvo by banning US companies from selling software and components to China-based smartphone maker ZTE Corp., for allegedly breaching an agreement related to an earlier incident of exporting US goods illegally.  The move came as a big blow to ZTE which procures nearly a third of the components used in its products from US suppliers.

Earlier this week, the initial rounds of the talks between Washington and Beijing paved the way for easing some of the trade-related issues between the countries. It is learned the discussions also covered the ban on ZTE and possible solutions to the stalemate. Expressing displeasure over the slow progress of the negotiations, Trump downplayed the talks terming them just “a start.” Taking forward the ceasefire efforts, Commerce Secretary Wilbur Ross will be visiting China next week.