Ceasefire in the trade war

04 February 2020

After 15 months of tit-for-tat tariffs, threats and acrimony between the US and China, a ceasefire has been reached between the two sides. Last month, officials from both countries met to sign the phase 1 trade deal that was first mooted in mid-December. The deal is only a first step and we have seen these truces break down in the past, but its scope goes beyond expectations in its reach in several areas. For example, according to the US, the deal pushes China to end its practice of forced technology transfer that has long been an area of significant angst for the US. It is also reported that the US will remove the tag of “currency manipulator” on the Chinese, something that China has consistently rejected.

On tariffs, the US will not proceed with the 15% tariffs on $160 billion worth of Chinese consumer goods and will halve the 15% tariff on $120 billion goods introduced in September. The original 25% tariff on $250 billion of Chinese imports will remain, acting as a carrot that could incentivise future reductions depending on the implementation of the deal. China for its part will exclude several goods originally slated for tariffs, while also committing to purchase $200 billion worth of US agricultural produce over the next two years. 

One would be naïve to believe that this represents the end of the trade war between the two sides. The battles between the two global superpowers go well beyond trade and are likely to remain a feature for some time to come. In the short-term, the focus may move on to export controls in areas such as emerging technology and using the US’s international influence to thwart the advance of companies such as Huawei on a global stage. This could have implications for the success of the deal just struck.

It is likely that the Trump administration has pushed hard to get this deal over the line for maximum political gain in advance of the elections later this year. Being able to say that he has followed through on his pledges on China is undoubtedly an electoral asset for Trump in the coming months. Moreover, the proposed 15 December tariffs, being on consumer goods, would have had a more visible impact on US consumers’ pockets and potentially hurt his electoral prospects. Having been successful in his aggressive approach with China, it remains to be seen whether Trump will now wish to turn his attention to the EU.

Trade tensions have not been the only contributor to weaker global prospects over the past 12 months but there has been compelling evidence that it has been the most important. A truce, even if it is to prove temporary, removes one of the most important economic risks facing the global economy in 2020.

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