Millennium Post

The US-China ceasefire

The two largest economies were brought to the discussion table to manage the pertaining trade deficit instead of constant retaliation

The US-China ceasefire

A significant outcome of the summit at Buenos Aires in Argentina was the temporary truce of trade between the USA and China. The truce has provided breathing space for a consensual adjustment of trade deficit.

The US-China trade war crippled the global trade after President Trump strengthened protectionism to safeguard American job seekers from the Chinese onslaught of export. It imposed 25 per cent tariff on steel and aluminium and proposed another 25 per cent tariff on $200 billion imports from China, beginning from January 2019.

The trade ceasefire for 90 days gives a breathing time to China to reduce the trade deficit by increasing imports of agriculture products from the USA and to exit tit-for-tat action by withdrawing the high tariff on American cars.

Four factors are believed to have played a role in the softening of the trade tussle. First, it was USA's rhetoric shift from safeguarding American jobs to contain Chinese acquisition of technological power. This would have challenged USA's global hegemony. In a report by USTR, it was revealed that China adopted "forced" technology transfer by making market access conditional to technology transfer. At the summit, China agreed to negotiate immediately on "forced" technology transfer, intellectual property rights and cyber threats.

Second, the trade war started to bite American farmers and some manufacturers. The stock market was down, erasing the benefits which stemmed from 2018 gain amid trade jittery. Third, the domestic compulsion of Xi Jinping to protect China's economy from any further slowdown and the concurrent impact on the forthcoming US Presidential election in 2020 presumably softened both leaders to cease aggressive attempts. Fourth, IMF downgraded the growth rates of both China and USA in 2019, citing the impact of the trade war. It forecasted that the growth of China and the USA would decline from 6.4 and 2.7 per cent and 6.2 and 2.5 per cent respectively in 2019.

Whether or not the truce lingers after 90 days, the climb down made a breakthrough in melting the ice and bringing the world's largest two economies on the discussion table. The truce gives an opportunity for India to balance its power game with China and RCEP, where China is the major stakeholder. Paradoxically, trade war was not a bane for India. It was rather propitious for warming up economic ties with China.

China is an export based economy. The USA has been the driving force for the Chinese economy since it is the biggest importer of Chinese goods. Nearly one-fifth of Chinese goods are exported to the USA annually. With the onslaught of tariff war, Chinese goods became expensive and it caused a major dent to China's exports and eventually imparted shadow on the Chinese economy.

Threatened by the US market closure, China diverted attention to India, which is considered a big global consuming market. With a high growth trajectory, India provides a bigger market for Chinese goods, which, it is believed, will counterbalance the damage to export to the USA.

On the trade front, China agreed to increase import of agricultural products from India, which hitherto were imported from the USA. Soybean is a case in point. China reduced import tariff on soybean meal from India to encourage exports. It is unlikely that the temporary truce will halt India's new export opportunities to China.

RCEP – the largest trade block comprising of ASEAN plus six countries - received a new lease of life after the trade war as India softened its opposition. Since the beginning, India was opposing the launch of RCEP without service trade, such as IT services. It also expressed concern for fair trade in the block apprehending that it would pave the way for the backdoor entry of Chinese goods to the Indian market.

The trade war helped China woo the support of members of RCEP, particularly ASEAN countries, coaxing them that the trade block would emerge as a major export destination for them after the USA hardened its protectionism. China is the biggest export destination for ASEAN, followed by the USA. Duty-free entry in RCEP will bolster ASEAN's export to China, unleashing a new lease of life to offset the damage caused by US high tariff.

With the trade war tapering, RCEP loses its strength in the global trade. This will concurrently strengthen India's non-committal stand to the block, with the USA relaxing its market. The USA is the second biggest export destination of India.

(The views expressed are strictly personal)

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