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Government Watch / Politics

Through a Glass Darkly – Improving Trade Relations with China?

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Predicting the future is hard – and gets harder every day, with volatility in markets, politics, technology development, international affairs and media snares.  But some things are getting easier to predict, like silhouettes emerging from thick fog.  Our future trade relationship with China is one.

Credit President Trump, as China is coming around.  Seasoned observers seem to think that trade concessions, with follow-on agreements creating institutional shifts within an economic megalith and Communist behemoth, are increasingly likely.  With these, may come side agreements, from a clampdown on Chinese fentanyl to improved multilateral relations and tighter sanctions on North Korea.

What do we know?  We know President Trump did the unthinkable.  He directly questioned the legitimacy of Communist China’s manipulation of currency, global trade practices, misuse of the World Trade Organization, theft of intellectual property, cybercrime and industrial espionage, market closure to US goods and services, workplace-related human rights abuses, public involvement in private companies, and allowing elements of the 5G supply-chain to advance Chinese security interests.

While a body-blow to prior stand-aside and accommodative US trade policies, President Trump delivered hard truths with a smile, cultivating what seems to be a working relationship with Chinese President Xi Jinping, as well as China’s broader senior diplomatic team.  

At present, relations are frosty.  Trade-offs on trade continue to be discussed behind closed doors.  A March 2 deadline for raising tariffs on China, absent a signed accord, has been extended – for now.  A rumored meeting between Presidents Trump and Xi at Mar-a-Lago appears to be off, but may reappear. 

Like circling wrestlers, these two presidents seem to be hunting tactical advantage, including where to meet, when and what to sign once they sit down.  But all this belies a bigger reality.  Progress is being made.  And after all, when President Ronald Reagan first sat with the former Soviet Union’s Mikhail Gorbachev, things were frosty.  Only over time, and following multiple agreements, did they warm.

We know a few other things, and these spell hope.   First, the litany of issues described above are all acknowledged to be on the table.  The first step in successful diplomacy is to put disagreements on the table, agree that they represent a difference worthy of being resolved, and then sit down to the table.  This is happening.

Second, the background reality is changing.  In effect, whether a silhouette moves forward through fog, or the fog recedes from the figure is unimportant – contrast, the reality seen by all, is changing.  Here is what is changing.  US growth continues on a tear, the past two years fastest in ten, unemployment at record lows, US worker productivity at a sudden high, wages rising, inflation stable, interest rates likely stay unchanged.  All this strengthens Trump’s hand.

On the flipside, China is facing a potential cliff.  Roughly 20 percent of Chinese exports go to the United States, and President Trump is making clear that their relative attractiveness to US manufacturers and consumers may soon fall, if he raises tariffs again. 

But that is not the big news.  Big news is that China is confronting a major slowdown, with its growth rate having dropped a third since 2011, and projected to fall another two points in the years ahead.   From 9.5 percent eight years ago, China’s growth is projected to be six percent this year. 

On one hand, China is our leading creditor, with more than a trillion dollars in US debt at end of 2018.  On the other hand, they have a major debt crisis of their own – with massive overbuilding, over-lending, devaluation and “stimulus” having swamped leading Chinese sectors after 2008.  They are – according to some experts – in serious trouble.

If Chinese growth continues to slow, in context of a slowing global economy – the one bright spot US growth – the Chinese bargaining position is likely to slip by the month.  All this reinforces an expectation that, although major institutional change will have to await later US-China accords (as major security agreements waited on successive Reagan-Gorbachev meetings), a positive deal is likely in the offing.

What appears to be emerging from the fog:  An understanding that slower Chinese growth, higher and sustained US growth, mutual debt and real US tariff leverage will produce a “meeting of the minds,” if not between regional players or indefinitely, at least between these two presidents for now.

Clearly, that agreement – however modest – will set the tone for global trade in the months and year or two ahead, as other issues continue to be wrangled, worried, and resolved.  These are the two largest economies in the world, bar none.  Agreement on even modest terms, given the rise of global trade tensions, rippling concerns about global growth, weakness in markets from Europe to the emerging world, will spell hope.

In short, while many economists continue to wring their hands over peripheral issues, inflation and recession fears, equity overvaluations to interest rate hikes, the truth is more sanguine:  Some form of US-China trade deal is more likely than not, even if it represents a mere first step. 

That may put some spring back in the global economy’s not-so-lively step, might just lead to an unexpected bump up in the US stock market.  Predicting the future is hard – and gets harder every day.  But our trade relationship with China might just be coming around, getting more predictable – not less. 

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