Trade wars: The only way is up?

One of the basic principles in economics is that trade makes everybody better off. This could explain why global tariffs nosedived since the 1930s (see the graph), global trade has boomed and global poverty has reduced by 10%.

However, trade wars has reared its head in recent years, most significantly between the US and China, resulting in a spike in tariffs since 2017. Globalisation has turned to slowbalisation and many fear that it may be in retreat.

Last week saw some reprieve, when officials from both the US and China agreed to the terms of Phase 1 of a new trade deal. US officials called the document an ‘historic achievement’, even though exact details of the deal must still be determined.

In general, the following was agreed:

1.      The US will reduce duties on $120bn of Chinese imports (from 15% to 7.5%), including a stay on $160bn of products which was due to take effect over the weekend.

2.      China committed to a renewed focus on intellectual property, financial services market access, currency stability and forced technology transfer.

3.      China also pledged to increase its purchase of US goods to the tune of $200bn over the next two years, including a commitment to purchase about $100bn of US agri commodities.

But, it is not this simple. While each point can be commended, concerns remain.

Point 1: Despite the ‘reprieve’ on duties and taxes, the new deal still leaves import taxes on $250bn of goods and 7.5% duties on $120bn of other goods. And many fear that Phase 1 will not be followed by a 'better' Phase 2.

Point 2: Many of the terms raised here appear similar to prior commitments made by China. For example, China’s G-20 announcements already outline currency stability and it has already committed to the further liberalisation of the financial services industry to foreign companies.

Which brings us to Point 3: It is certain to boost US exports to China, which is a political boon for the Trump administration, but does little to counter the fact that duties and taxes on imports remain higher today than last year.

This leaves us to ask: Does the new deal make everyone win with the outcome of a positive-sum game, or is this a zero-sum game masquerading as such?

#trade #tradedeal #USChina #globalisation #slowbalisation #business #tariffs #duties #internationalbusiness #internationalisation

Sources:

Deutsche Bank. 2019. Deutsche Bank Research.

Donnan, S. 2019. Bloomberg Terms of Trade. 16 December 2019.

Murray, B. 2019. Bloomberg Terms of Trade. 14 December 2019.