US-China: a slow-burn conflict
Managing Director, Asia-analytica
Summary: The signing of a trade agreement between Washington and Beijing will not necessarily put an end to all disputes in the longer term.
The real issue is whether markets can look forward to the end of the tariffs fight or whether this just a lull before the start of Trade War II?
With China, as always, the devil is in the implementation. The key to sustained peace in trade and investment between the two countries is Chinese acceptance of provisions to enforce agreements – say, an appeals board comprising US and Chinese members to settle disputes or some other mechanism. This is likely the final hurdle to a deal being clinched.
Signs from Washington are consistent with negotiations entering the home stretch: rolling back the March deadline on tariffs, talk of preparations for a summit between the US and Chinese presidents and, given the many positive tweets from the White House, a US president intent on sealing a deal.
China for its part has always made it clear that it does not want a fight – certainly not at this critical juncture of its economic development. Its goal is to retain access to the huge US market with minimum concessions.
Ironically, trade is the simpler part of the negotiations. When disputes are about dollar values, about who owes how much to whom, solutions are relatively straightforward. Washington appears to have already made headway on large-scale Chinese purchases of American goods to narrow the trade deficit.
The real sticking points are market access and protection of intellectual property rights – but not as a matter of principle. China has been saying for decades that it will further open up its markets and work harder towards protecting intellectual property rights.
In practice, however, foreign businesses all these years have had to deal with a protected market where the playing field is tilted in favour of domestic companies with forced technology transfers a common complaint.
Once more, with feeling
For China to simply repeat these pledges does not even begin to approach the solution to the problem. Without detailed provisions for enforcement, any agreement will be little more than a Band-Aid setting the scene for the next trade fight.
Much will be made of a new law to be reviewed at China’s yearly meeting of the legislature, the National People’s Congress, which starts next week.
The new Foreign Investment law, if adopted, will replace three existing laws on foreign ventures. The move is being trumpeted as a big step towards further opening of the Chinese market and is likely to be presented to the foreign business community as evidence of good faith of Beijing’s intention to honour its commitments.
The draft law touches on issues such as unfair technology transfers, intellectual property rights protection and equal opportunities in public procurement. But it is couched in such broad terms and vague language that there is ample room for discretionary implementation of the law.
And note that China continues to maintain a legal distinction between foreign-funded and domestic companies.
What won’t change: slowing growth
In terms of economic growth, any agreement that restores the US export market for China is definitely positive. But the Chinese slowdown is essentially an inside job. The tariffs fight merely exposed those who’ve been swimming naked.
China’s problems are not cyclical, as some have argued. They are systemic. Among them:
• A rising debt mountain that is almost three times as large as GDP compared with 140% a decade ago.
• Chinese mortgage-fuelled household debt approaching 50% of GDP compared with 30% in 2012.
• NPLs rising despite the economy expanding at more than 6.6% a year in real terms.
• The threats to financial stability from the $15 trillion shadow banking sector
• Falling savings rate as an ageing population pays for its retirement.
Whatever agreement is concluded in the coming days, US China relations will remain strained. This is now about growing American perceptions of China as an all-round threat rather than just a rules-bending competitor in trade and commerce.
From building military air strips in disputed areas in the South China Sea to Chinese pressure on foreign airlines to label Taiwan as a part of China, the relationship between the world’s two biggest economies has tilted from greed to fear.
Mutual interest had kept relations manageable. American businesses have been and are still eager to break into China’s massive market of 1.4 billion people. And Chinese industries continue to be keen on obtaining American technology and to break into the US-dominated global financial system.
But the fear of a swaggering China with the wherewithal at last to successfully push its agenda – on trade, investment, market access, on redefining freedom of navigation in the South China Sea, on naval patrols which of late have become a regular sight in waters close to Taiwan, maybe even on who has what rights in the Arctic Ocean – is definitely concentrating minds in Washington.
The coming Ice Age in US-China relations should also start concentrating minds in the investment community with the business landscape in China headed for irreversible change.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)