US-China Relationship -Tolerance Not Acceptance

US-China Relationship -Tolerance Not Acceptance

The genesis for our recent weekly articles has been the UBS Greater China Conference held in Shanghai during the week commencing 11th January of this year. Despite the backdrop of Covid-19, the conference went ahead with local investors attending in person and a virtual audience joining from around the globe, including the True Potential investment team.

These events provide an opportunity to obtain information and insight on many aspects of the global economy, alongside the opportunity to consider future trends, such as those explored in recent weeks. This week we want to highlight several sessions on resetting the US-China relationship.

Several sessions highlighted the challenges of resetting the relationship, especially when the global economy grapples with COVID-19. Additionally, the virus’ disproportionate impact on the US in terms of lives lost (4% of the global population, 20% of global COVID-19 deaths), adds to the difficulty of a policy detente. However, President Biden and his Chinese counterpart Xi Jinping possess the opportunity to reposition the relationship between the world’s largest economies.

Backdrop to US- China Relationship

It is no secret that China’s relationship with the US has deteriorated under the Trump administration. Exacerbating the deterioration in ties was Trump’s use of Twitter to conduct diplomacy. Unconventional to say the least. But did Trump’s confrontational measures produce his desired outcome of a trade balance tilted favourably to the US?

For readers who want a deep dive, and more detail into trade outcomes, the link below to the Peterson Institute provides more insight. We have selected some charts from the document, shown later, to help us explain some key points –

(https://www.piie.com/blogs/trade-and-investment-policy-watch/anatomy-flop-why-trumps-us-china-phase-one-trade-deal-fell).

Basically, Trump did not achieve his aim in key parts of his agreement with China.

  1. China said they would purchase $200bn more US goods and services in 2020/21 from 2019 levels. Discounting the effect of COVID-19 on the dynamic, there is limited evidence of policy success. Whilst there was an improvement in China’s imports from the US in 2020, it is worth noting these improvements came off a low 2019 base already impacted by trade disputes and tariff issues. Any progress is, therefore, only restoring trade flows to 2018 levels.

Source: Peterson Institute for International Economics, data as of December 2020

  1. US manufacturing incurred a disproportionately negative impact due to the tariffs. An unintended consequence of Trump’s China trade policy. Realised exports of $57bn from the US to China fell well short of the $100bn envisaged boost. More pertinently, the figure represents a decline from the level of 2018; not the positive outcome that US manufacturers were expecting.

Source: Peterson Institute for International Economics, data as of December 2020

  1. Alongside the challenging trade backdrop, the impact of tariffs on Chinese goods imported into the US, disproportionately impacted US citizens. US consumers and workers ended up worse off. According to one think tank, Trump’s tariff imposition, if sustained over the longer term, would reduce wages in the US by 0.15% and prevent the creation of almost 180,000 additional jobs.

What Now Under Biden?

It seems clear from presenters at the Conference that President Biden will put the trade deal agreed by President Trump under review. It is the only way for him to seek better outcomes for the US and China. However, no one appears to have much faith in immediate change. Most see ongoing difficulties and continued distrust, on many levels. For example,

  • On global trade and diplomatic ties, China looms large as a strategic threat to the US in the collective minds of both US political parties and the US general public.
  • Relationships involving business collaboration and US domestic security are increasingly blurred; and
  • Delisting of Chinese businesses from US exchanges is tangible evidence of the distrust.

Further evidence of the challenges occurred this week following reports of Biden’s first call with Chinese President, Xi Jinping. According to US sources, the President expressed concerns about Chinese economic practices, restrictions of freedom in Hong Kong, Chinese actions toward Taiwan and alleged human rights abuses toward Chinese minorities.

However, despite wary posturing, both sides recognise the need to find common ground and have pledged to engage with each other where it makes sense to do so. A need for tolerance reinforced through views expressed at this week’s conference.

Tolerance Through Engagement

A key question being asked is what needs to happen to improve trust in the bilateral relationship between the two countries? Conference participants outlined an approach titled ‘targeted reciprocity’. In other words, cooperation where possible and mutually beneficial for both nations. Tolerance not acceptance in the eyes of the US President.

Trade is an essential area for both countries to engage bilaterally. After all American consumers benefit from lower-priced goods and the Chinese economy benefits from a wealthy consumer market. Healthy competition without unnecessary confrontation would be a welcome way forward and President Biden’s grasp the opportunity within in his hands. His track record highlights the importance he places on foreign policy engagement and the US’ bilateral relationships.

In conclusion, of one thing we can be sure. Diplomatic initiatives will not be conducted on Twitter!

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

Global Markets