One can hardly believe that it was just a few weeks ago that news first broke out regarding trade sanctions by the United States against China. During the first two weeks all economics news were dominated by that event: the tariffs against China, as well as China’s corresponding tariffs on US goods. The financial markets suffered quite a lot of shock then, but just as suddenly as it came, the news about tariffs died out and we have not heard much since then.
The reason for that lies in diplomacy. To begin with, when President Trump announced his first round of tariffs, his decision was not backed up by his key advisors and there was resistance from within the White House. Trump’s administration might have thought that the tariff plan would be good in exercising pressure on China, with whom the United States has a trade deficit, a key reason for the tariffs (the second official reason is China’s allegedly unfair treatment of US intellectual property). Nevertheless, while China expressed a reluctance to deal with tariffs and spoke about how this would have a negative impact on the global economy, they were still able to match all sanctions and leverage their own tariffs on US goods in return. This spooked the United States, as it showed their tactic is ineffective. Eventually the United States and China agreed to negotiate – a process that began earlier this week. So, what did the two countries discuss and agree on?
Issue number one on the table is, of course, the trade deficit of the US with China. This means that the United States are importing much more Chinese goods than they are exporting to China. Nevertheless, economists doubt what can be done in this respect, because China is able to produce a lot on its own and does not depend on imports from other countries too much. What China might be interested in is high quality technology from the US, but here America has sent a negative message when it banned Chinese smartphone manufacturer ZTE from using American products (Qualcomm processors, Android OS) in their phones.
Another matter is also the involvement of foreign investors in the Chinese economy. The US wants more access to Chinese ventures because of the vast financial opportunities of their market. Nevertheless, while China always shows a readiness to open up (as it has again in the past few weeks), this usually comes with many requirements that still deter many investors.
The United States also hope to be able to negotiate regulations on foreign companies who choose to manufacture their goods in China. Currently these companies are required to hand over much of their know-how and other intellectual property to the Chinese government in exchange for access to China’s cheap labour market. Because of this China is capable for producing good “dupes” of Western products, which the original companies view as unfair competition.
Overall, analysts are not very optimistic about these negotiations. The United States appear to want to achieve a great many things over a two-day meeting against a government that has been very careful and patient in its global strategies. It appears that China holds far more leverage over the United States and is therefore better positioned to negotiate. This is why it is unlikely that Trump would get what he wants easily.
