Temporary trade truce

US and China have a long way to go

Two of the world largest economies have arrived at what can only be called a temporary truce in their ongoing trade war. The US and China signed phase one trade agreement on Wednesday under which the latter has agreed to import additional goods and services worth $200 billion by 2021. Accordingly, China will import more agricultural commodities, energy items, manufactured goods, and services from the US. The deal also seeks to stop the forced transfer of technology by US companies to Chinese firms. China is also expected to protect intellectual property and address the issue of counterfeiting. Expectedly, US President Donald Trump has called it “a momentous step — one that has never been taken before with China”, and will be looking forward to benefit from it in his re-election bid. Meanwhile, China has averted further escalation at a time of slowing economic growth. The US has also decided to drop China’s designation as a currency manipulator.

To be sure, the agreement is certainly a step forward in the context of the ongoing trade tensions between the two and the potential risks they carry for the global economy. But both parties have a long way to go before they can attain lasting peace on the trade front. Several issues will keep uncertainty alive. For instance, the US will not be reducing most of the tariffs imposed by the Trump administration on imports from China. They are likely to be taken up in the next phase. Therefore, consumers and businesses will continue to pay higher tariffs and, since the arrangement is fairly limited, it will not help boost investment and growth. Further, the events over the past couple of years, including this deal, have significantly increased government intervention in trade, which itself will continue to induce a fair amount of uncertainty.

Although both countries have got something to show their citizens, it is difficult to predict how things will move forward from here. Trade tension between the two countries is also intertwined with geopolitical interests and their rivalry for technological supremacy. However, purely in terms of trade, there is evidence that the imposition of tariffs has not benefited the US economy. A recent research paper by Aaron Flaaen and Justin Pierce of the US Federal Reserve Board, for instance, concluded: “For manufacturing employment, a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs.” 

While the progress on US-China trade relations will help improve confidence in the global economy, at least for now, India will need to wait and watch. The Trump administration had increased tariffs on imports from India as well, which led to a retaliation by the Indian government. Since India enjoys a surplus, the US is in a better position to sway the terms of any trade negotiation. Further, the decision to not join the Regional Comprehensive Economic Partnership and look for bilateral trade agreements has weakened India’s position. It has also not been able to attract businesses moving out of China in a big way. Therefore, India will need to carefully evaluate its options to be able to protect its interests in trade with the US.