5 min to read
Why should we worry about the US Trade Deals?
So, the US-China Deal Part 1 is finalised, and next up are deals with Europe and India. Should we be worried?
The USA says it has succeeded in implementing a Trade Deal with China. Well… at least partly. Why a trade war in the first place? Answer: The USA has historically had a huge and consistently widening deficit with China in terms of trade. The US believed it was due to two reasons:
- China Encouraging exports with excessive manufacturing subsidies
- China clamping down on imports from USA with extra Duty on US imports (Countervailing Duty or CVD)
The solution was plainly simple -
Impose duties on China
The US did do that, and imposed over $200Bn worth of duties, severely hampering the Chinese industries. What is to be noted here is that, despite the Trade War being cloaked as a problem aimed at Chinese exporters, the Trade War was more about the US importers, and their increasing rates of imports into US mainland.
The US wanted to corner the Chinese, with their Dollar might, and force them into accepting a Trade Deal that could benefit the USD, and prevent depreciation of the USD.
The steps were pretty simple. The US had to:
- Make the Chinese agree on a Free Trade Agreement
- Make sure that the Chinese central bank would not meddle with their Currency
- Make sure that Chinese government owned companies would not dump products into USA
- Make sure that the American companies had good protection of their Intellectual Property Rights
- Get a simpler conflict resolution system between US & Chinese companies
With these initially in mind, the US approached China for a Trade Deal that could ensure the stability of the US Dollar, as virtually the rest of the world hinges on that, whilst ensuring that American companies have a fair market to compete. Seems pretty straightforward right?
But, the issue is that, any Emerging Market Economy, has to outgrow the broader market and compete with the developed economies in a global market whilst working towards meeting growth in HDI(Human Development Index) as well, which would require humongous amounts of Welfare expenditure. This is just too much strain, and most EMs end up in debt piles even with the slightest mismanagement of their Economies.
The Chinese economy has been contracting since 2016, and is in fact responsible for the current global slowdown that we have. Not just China, but, since 2018, we have seen almost all of the EMEAs (Emerging Markets of East Asia) contracting in terms of growth, and losing value consistently. We call it The Great Asian Bear, due to it’s sheer size and the industries it has left in shambles, after having hammered them down to virtually dust.
With such a fragile Asian Economic situation, any further pressure would only lead to more Chaos and pain to all the EMEAs.
But, what did the US achieve with their China Trade deal?
The US couldn’t force the Great Dragon to heed to all their demands, and in fact, the Chinese have played it pretty smart. They accepted to take care of the IPR issues, and instead of getting rid of their internal subsidies, they agreed to buy more produce from USA. The USA has consistently maintained these numbers at $200Bn, but, the Dragon has maintained that it’s imports would be solely based on internal demand, and it’s economic viability. This present Trade Deal (at least until the Part 1) seems to be more of an eye-wash “damage-control” PR stunt pulled up by the present US government to maintain it’s electorate that has been taught to hate the Chinese systematically over decades. (Since the Nixon days) Fun Fact: The US is still pressing for China to import agricultural produce forever, but, China says it is ready to give a commitment only for the next two years, and even the agreement is vague as to the future beyond 2025.
With a weakening Chinese economy that is stressed to an undue extent, a binding trade deal is DOOM. If China fails on it's part of the deal, the US would raise it's sanctions on China. Honouring it's commitment to USA would be done at the cost of it's present trade arrangements with it's Asian counterparts, further weakening the Asian Economy, which would in turn affect the Chinese economy.(Simple math - China runs out of cash to import from it's existing partners which is mostly Asia, as it decides to honor it's commitment with the USA and Asian countries lose more)
What next for US?
The USA has stated that it intends to pursue similar trade deals with India, and Europe. Now, a similar trade deal with either of these countries would spew doom all over. The Eurozone is yet to recover even in part from the triple shocks of the Greek Crisis, the Turkish Currency collapse which rattled investors all over the globe and Brexit.
Growth is still starkly low, and even with negative interest rates, demand situaiton is bleak. With conflict ridden zones, and excessive governmental mismanagement in the ASEAN overall (Yes, that’s a brave accusation to make, and I choose to make it!), any Trade deal with any country (leave alone India which is set to face it’s worst Economic year since the 2008 crisis) is Armageddon.
One must always remember that, all the developed economies of today had their robust expansion phases when there was no WTO (World Trade Organisation), when there was no FTA (Free Trade Agreement), and by encouraging their own industries to an undue extent. Not one country can claim to be innocent of this. Though this can’t be done on a large scale, the way China does it, without governmental intervention, there is just no way EMs can compete with the Developed economies because of their sheer disadvantage of scale, and the possibility of their companies mostly being taken over by Corporations of the Developed countries.
An unusually agressive US pushing countries to accept Trade Deals, at a time of a Defence-less global economy, would crash the EMs, and in-turn affect the US as well.
P.S. Let’s see if the Phase 2 China deal goes through at all! I’m not banking on any sort of agreement between the US and China, especially now.