After 18 months of ricocheting economic conflict, the two superpowers have finally decided to call it a truce. The Phase 1 agreement saw China agreeing to purchase an additional $200 billion U.S goods and services over the next two years, enforcement of intellectual property rights, and to cease forced technology transfer and currency manipulation. In exchange, U.S would be scaling back the tariffs placed on certain Chinese goods.
Most observers have commented on the pressure that this will put on the Chinese government. This is attributed to two factors: the fall in exports from U.S to China during the trade war and the discrepancy between the mentioned amount of exports in the agreement versus in actual. Across the duration of the trade war, U.S goods exported to China fell by $20.6 billion. If this was calculated into the equation, the actual amount of total goods exported would have to be $228 billion. Looking at the analysis of Chad Bown, senior fellow at the Peterson Institute for International Economics, one will find that the categories entailing increased exports were $79 billion in 2017, and not the $130 billion mentioned in the agreement.
While this agreement is not favourable for China, it clearly states that any violation by either party which could not be amicably discussed would lead to tariffs. Hence, the deal has been criticized as an underwhelming compromise and shows the global economy’s likely move towards deglobalisation.
On the other hand, countries that have enjoyed a temporary economic boost from the trade war such as Brazil could face a reduction in export demand. As China is Brazil’s largest trading partner, the redirect of Brazilian exports towards U.S exports has been forecasted to leave a 4% negative shock in exports. Vietnam has been the largest beneficiary of trade diversion, especially U.S import substitution, earning them an increase in 7.9% of GDP. This trade deal might slow down its title as a rising star in economic growth which has been promising until the deal came into the picture.
As we hang around for Phase 2 of the deal, third-party countries remain on edge about how this deal might affect their respective economies. Simultaneously, analysts are dubious regarding the permanence of this deal and are yet to see how this could provide a comprehensive resolution.
Article written by: Esther Yap