Why slow­ing economies could prod US and China to reach deal

The Myanmar Times - Weekend - - International Business -

THE Trump ad­min­is­tra­tion and China are fac­ing grow­ing pres­sure to blink in their six-month stare-down over trade be­cause of jit­tery mar­kets and por­tents of eco­nomic weak­ness.

The im­port taxes the two sides have im­posed on hun­dreds of bil­lions of each other’s goods — and the threat of more to come — have height­ened anx­i­ety on each side of the Pa­cific. The longer their trade war lasts, the longer com­pa­nies and con­sumers will feel the pain of higher-priced im­ports and ex­ports.

Their con­flict is oc­cur­ring against the back­drop of a slow­down in China and an ex­pected U.S. slump that a pro­longed trade war could worsen — a fear that’s weigh­ing on fi­nan­cial mar­kets. Yet those very pres­sures, an­a­lysts say, give the two coun­tries a stronger in­cen­tive to make peace.

“The U.S. and China now have a strong shared in­ter­est in strik­ing a deal in or­der to halt the down­ward spi­ral in busi­ness and in­vestor con­fi­dence, which have taken a beat­ing in both their economies,” said Eswar Prasad, pro­fes­sor of trade pol­icy at Cor­nell Univer­sity.

The eco­nomic threats, agreed Wang Yong, an in­ter­na­tional re­la­tions spe­cial­ist at Pek­ing Univer­sity, “might be con­ducive to ne­go­ti­a­tions” by nudg­ing Beijing to­ward mar­ke­to­ri­ented changes long sought by the United States.

Still, it will hardly be easy to bridge the com­plex dif­fer­ences be­tween the world’s top two economies. They range from Pres­i­dent Don­ald Trump’s in­sis­tence that China buy more U.S. prod­ucts to wide­spread as­ser­tions that Beijing steals trade se­crets from for­eign com­pa­nies op­er­at­ing in China.

Ne­go­ti­a­tions be­tween the two na­tions are ex­pected to re­sume next week. Gao Feng, a spokesman for China’s Com­merce Min­istry, said last week that the two sides have “made spe­cific ar­range­ments for face-to-face meet­ings” and are talk­ing by phone. Gao of­fered no de­tails, and the Of­fice of the U.S. Trade Rep­re­sen­ta­tive de­clined to con­firm the talks.

The world is watch­ing anx­iously. China and the United States, the two largest economies, are the “main engines of the world,” noted Song Li­fang, an econ­o­mist at Ren­min Univer­sity in Beijing. That makes their dis­pute “a mat­ter not only for the two coun­tries but for the world,” he added.

The dis­pute is “a ma­jor fac­tor” in a slow­down in global growth, Song said, and a set­tle­ment would “help in ar­rest­ing the de­cline of the economies of the two coun­tries and of the world.”

Trump has long com­plained about Amer­ica’s gap­ing trade deficit with China: The gap be­tween what Amer­i­cans sold and what they bought from China in 2017 amounted to $336 bil­lion and will likely be higher in 2018. But the dis­pute goes far deeper than lop­sided ex­ports and im­ports. It’s fun­da­men­tally a high-stakes con­flict over the econ­omy of the fu­ture.

The U.S. ac­cuses China of de­ploy­ing preda­tory tac­tics in a drive to sur­pass Amer­ica’s tech­no­log­i­cal supremacy. A re­port in March by the U.S. Trade Rep­re­sen­ta­tive ac­cused China of hack­ing into U.S. com­pa­nies’ com­puter net­works to steal se­crets and co­erc­ing Amer­i­can com­pa­nies to hand over tech­nol­ogy as the price of ad­mis­sion to the Chi­nese mar­ket.

To try to com­pel China to re­form its ways, Washington has im­posed tar­iffs on $250 bil­lion in Chi­nese im­ports; Beijing has coun­ter­punched by tax­ing $110 bil­lion in U.S. goods. Trump had been set to raise the tar­iffs on most of the Chi­nese goods on Jan. 1. But he and Pres­i­dent Xi Jin­ping agreed to a 90-day cease-fire to try to re­solve their dif­fer­ences.

Since then, the case for peace has strength­ened as eco­nomic risks in the U.S. and China have grown and fi­nan­cial mar­kets have reeled. For 2018, the Dow Jones In­dus­trial Aver­age — Amer­ica’s high­est-pro­file stock mar­ket bench­mark — fell nearly 6 per­cent, its worst per­for­mance since 2008. China’s Shang­hai Com­pos­ite In­dex sank nearly 25 per­cent.

On top of con­cerns about col­lat­eral dam­age from the U.s.-china trade war, in­vestors in the U.S. mar­kets are wor­ry­ing about ris­ing in­ter­est rates and a wob­bly U.S. real es­tate mar­ket. Fears are grow­ing that the sec­ond­longest eco­nomic ex­pan­sion in U.S. his­tory could slide to a halt next year or in 2020. Cut­ting a deal with Beijing could help at least re­duce the threat.

China’s econ­omy has been de­cel­er­at­ing since the gov­ern­ment pulled back on bank lend­ing a year ago to try to curb a run-up in debt. The In­ter­na­tional Mone­tary Fund es­ti­mates that China’s econ­omy grew about 6.6 per­cent in 2018, down from 6.9 per­cent in 2017. But heavy gov­ern­ment spend­ing masked weak­ness in pri­vate-sec­tor ac­tiv­ity. In De­cem­ber, fac­tory ac­tiv­ity shrank for the first time in more than two years.

Auto sales in China plunged 16 per­cent in Novem­ber from a year ear­lier. It was the fourth month of con­trac­tion, and it put an­nual sales in the world’s big­gest auto mar­ket on track to con­tract for the first time in three decades.

De­spite its soft­en­ing econ­omy, China will likely find it dif­fi­cult to com­ply with U.S. de­mands to slow its eco­nomic am­bi­tions. Those am­bi­tions cut to the heart to China’s drive to become the world’s 21st cen­tury eco­nomic su­per­power.

“It is dif­fi­cult to solve the trade dis­pute im­me­di­ately be­cause the U.S. de­mands are too high, es­pe­cially de­mands for changes in China’s eco­nomic and so­cial sys­tems, which it is dif­fi­cult for China to ac­cept,” said Song, the econ­o­mist at Ren­min Univer­sity.

Wendy Cut­ler, a former U.S. trade ne­go­tia­tor, said the U.S. likely can’t re­al­is­ti­cally set­tle for any­thing less than an agree­ment by Beijing to re­form how it does busi­ness.

“There are cer­tainly com­pelling rea­sons for both sides to reach a deal and avoid fur­ther tar­iff in­creases,” said Cut­ler, now vice pres­i­dent at the Asia So­ci­ety Pol­icy In­sti­tute. “How­ever, th­ese rea­sons can only take you so far... With­out a strong deal that ad­dresses struc­tural is­sues, it sets the ad­min­is­tra­tion up for crit­ics to say, ‘You took us into a trade war for this?’ ”

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