Friction between China and the United States dates back even prior to the establishment of the World Trade Organisation (WTO), but President Donald Trump will likely achieve what many of his predecessors could not. The high-level talks between the US and China were resumed on February 21, with the US team composed of the US Trade Representative, the treasury secretary, the commerce secretary and economic advisors from the White House, while the Chinese delegation was headed by President Xi Jinping’s special envoy, Vice Premier Liu He.
The most crucial element of the ongoing trade negotiations was the reduction in the bilateral trade surplus between China and the US. In 2018, China exported $493.49 billion worth goods to the US, while China’s imports from the US were a meagre $111.16 billion, or 7.2 per cent of US exports. Mr Trump had asked China to restrict its exports to the US to the level of its purchases, namely, $111.16 billion, with March 2 as the deadline. If the matter was not resolved by that date, the US would go ahead and impose taxes on $200 billion in Chinese goods from 10 to 25 per cent.
When the whole world, particularly South Korea, Taiwan and India were gearing themselves up to exploit the huge opportunity to penetrate the US market, China’s willingness to hike its US imports from $111.16 billion to $1.2 trillion reported by CNBC TV on February 22 came as a shocker to all these expectant countries. Bloomberg TV announced China’s proposal to buy $30 billion worth of agricultural products from the US, including soya bean, corn and wheat. This will undoubtedly provide great relief to American farmers who have been hit badly by the retaliatory taxes imposed by China on soya bean in the recent past.
Needless to say, such an unexpectedly steep rise in US imports from $111.16 billion to $1.2 trillion will be a great moral booster to the US economy. When China increases its US imports to $1.2 trillion, it will be well within its rights to increase its exports to the US from $493.49 billion to $1.2 trillion, which will be purely a reciprocal arrangement between the two nations. This will shut the doors for all other exporting countries, such as South Korea, Taiwan, India, Vietnam and Malaysia.
Such a steep rise in US exports to China, if it comes through, will be a shot in the arm for Mr Trump. Past presidents of the US, from George HW Bush (who had earlier served as the US Ambassador to China) to Bill Clinton, George W Bush and Barrack Obama, could hardly make any headway to resolve the trade war between the world’s two largest economies. Mr Trump’s achievement will be particularly significant. During his election campaign, he had promised to fix “China’s long-time abuse of the broken international system and unfair practices.”
In this connection, one should note that China is the world’s largest buyer of US treasury bonds and hence the largest holder of the sovereign debt of the United States. In fact, China has been accumulating US treasury bonds over a period of time, owing to the large trade deficit between the two countries. According to US Treasury sources, China cut its treasury holdings from $1.184 trillion in December 2017 to $1.123 trillion in December 2018.
Incidentally, Japan, the second-largest holder of US treasury bonds, also cut its US treasury holdings from $1.0641 trillion to $1.0426 trillion during the same period. CNBC TV reported that Larry Fink, CEO of the world’s largest asset management fund, Black Rock, is worried about the long-term impact of the US-China trade war on US treasury bonds. The US federal budget deficit has been rising over the last six years and stood at $799 billion in 2018, and is expected to touch $1 trillion in 2019. As China starts dumping its US treasury holdings, it would be selling them at a loss that would mean loss of capital; in the process it will weaken the dollar. As a result, US exports are bound to become attractive.
All trade-related issues, including intellectual property, are likely to reach a final settlement at a summit to be held between Mr Trump and Mr Xi at Mar-a-Lago, Florida, later this month (however, no date has been set for the proposed meeting).
The writer is a former Staff Member of the International Monetary Fund, Washington DC
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