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How the US-China trade deal affects business in China

March 09, 2020

China and the United States are the two largest economies in the world, so it comes as no surprise that they are important pillars of the global economy. China is the world’s largest exporter, while the US is the world’s largest importer, and the two countries have a mutually beneficial relationship that dates back decades. While trade between China and the US began in the late 1980s, it rapidly accelerated after China joined the World Trade Organization in 2001. Despite the many benefits to both countries, there has been consistent skepticism surrounding trade with China, leading to the trade war that unofficially began in 2018. Aiming to ease tensions, China’s Vice Premier Liu He and US President Donald Trump signed the US-China trade deal in January 2020. The agreement is expected to have a significant impact on the global economy and will affect business in China. Here’s what you need to know.

What is the US-China trade deal?

The “Economic and Trade Agreement between the United States of America and the People’s Republic of China,” or US-China trade deal for short, is an agreement that aims to put an end to the costly escalation of the US-China trade war. It addresses concerns from both parties and establishes commitments to ease tensions and encourage bilateral trade. It was signed on January 15th, 2020 and took effect on February 14th.

US-China trade deal chapters

The trade deal is a comprehensive agreement that addresses a number of concerns and challenges, so it is broken down into seven chapters. Chapter One: Intellectual property rights. Following US concerns about China’s handling of intellectual property, China agreed to increase protections. This will help US companies take civil and criminal action for the theft of trade secrets, and the chapter includes stricter measures regarding patents, trademarks, online piracy and counterfeiting. Chapter Two: Technology transfer. China agreed not to force US companies to give up ownership of their technology in mergers or investment transactions when seeking licensing or administrative approval – a commitment it violated after joining the World Trade Organization. Chapter Three: Food and agriculture. China agreed to loosen regulations around US food and agriculture, as the previous restrictions were limiting the export of various US food and agricultural goods to China. Chapter Four: Financial services. Both China and the US agreed to open their financial services sector to competition from each other, allowing them to receive non-discriminatory regulatory treatment. This may ease investors’ fears that the trade war would cause a separation between capital markets. Chapter Five: Exchange rates. Both countries made commitments not to devalue their currencies to benefit exporters. This chapter aimed to maintain a market-based exchange rate and publicly disclose foreign exchange positions for accountability and enforcement. Chapter Six: Expanding trade. Following the introduction and escalation of various tariffs, the US agreed to reduce tariffs and cancelled plans to target additional imports. China suspended its pledge to retaliate, and committed to buying $200 billion more in US goods over the course of two years. Chapter Seven: Dispute resolution. The final chapter aimed to create a mechanism to ensure that both parties abide by their commitments. It established a framework for officials from both countries to meet regularly to address violations. If disputes are not resolved after the meetings, either country can take action without a counter response, so long as the action is taken in good faith.

Economic impact of US-China trade deal

China and the US are the two largest economies in the world, making this agreement a big step after months of rising tensions. While the US and China are the only countries directly involved in the agreement, its influence can be felt by countries around the globe. And although most of the effects are positive, there are both benefits and drawbacks that should be be acknowledged:

Signalling

China’s inclination to come to an agreement with the US signals that it is willing to negotiate and compromise with other countries. China seems to have made more compromises in its commitments, indicating that it is making a sustained effort to engage with the global economy. Plus, with stronger protections surrounding technology, intellectual property and finance, countries will have more confidence trading with China.

Trade diversion

When the tariffs were initially imposed, both China and the US shifted their focus to other countries around the world, causing a significant diversion in both imports and exports. Since this agreement signals the end of the bilateral trade war, countries will again change the structure of their imports and exports by countries of origin and destination. While this is good news for both China and the US, other countries are at risk of losing market share as bilateral trade ramps back up. Farm products are one of the many exports affected, leaving countries like Canada, Australia, New Zealand, Brazil and Argentina to find new buyers for their goods.

Prices

Much like the diversion of imports and exports, the finalization of the trade agreement also entails a global price adjustment of many goods. The tariffs forced countries to find alternate trade partners and adjust prices to accommodate, but they will now need to revert to previous arrangements now that China and the US have reached an agreement. However, the original partnerships may longer be viable as many of the higher tariffs still remain in place, raising the cost of global trade. Oil prices, for example, have dropped due to the decline in global trade caused by the initial tariffs, and have not adjusted since the tariffs have been lifted.

Favoritism

One major issue caused by this agreement is the US’s exclusive purchasing commitments from China in exchange for suspending further tariff increases. The World Trade Organization claims it is unfair for countries to offer exclusive market access to one trading partner and not others outside of a formal free-trade agreement. The “most favoured nation” rule – a foundational principle of the WTO – requires equal treatment of all countries.

How does the US-China trade deal affect consumers?

The US-China trade deal will have a significant impact on the global economy, but many consumers are wondering how it might affect them. These are two main areas where consumers might feel the effects:

Stock market

The tariffs and ensuing trade war sparked instability in stock markets as each country aimed to build leverage against the other. This volatility caused major stock indices like the Dow Jones and S&P 500 to fall, reducing the value of investors’ portfolios, workers’ 401(k)s and more. The signing of this deal means more stability in stock markets, giving consumers more confidence to resume trading.

Consumer goods

Kathy Bostjancic, Chief US financial economist for Oxford Economics, estimated that the initial tariffs could have cost the average US household an additional $650 a year. The signing of this agreement is likely to return prices to original levels, allowing consumers to save on their usual purchases.

How the US-China trade deal affects business in China

Investors and business owners are concerned about the effects of the trade deal on business in China. The deal will affect a number of industries and may cause slight adjustments in the way some firms operate, but is mostly good news for businesses in China.
  • Increased production. As bilateral trade between the US and China returns to normal and volume increases due to the reduction in tariffs, businesses are expected to ramp up production to meet demand.
  • More capital. The trade war created uncertainty for both businesses and investors, causing a reduction in investments in Chinese businesses. Now that the agreement has been signed, Chinese businesses can expect more available capital as demand from the US increases and investors regain confidence.
  • Steady exchange rates. The trade war caused the value of the Yuan to fluctuate, affecting the costs of production inputs, sales forecasts and more. This volatility created uncertainty and increased exposure to risk, which limited earning potential for many businesses. The signing of the trade deal should lead to more stable exchange rates as both countries have a clearer vision of the future.
  • Reduced barriers. As the trade war escalated, many Chinese businesses were forced to adapt. For some, that meant shifting exports to other countries, scaling down operations or increasing prices, which created barriers between companies. Now that the deal is in place, these companies can return to business as usual, reducing barriers that decreased efficiency.
  • Higher profit margins. The tariffs imposed by the US directly increased operating costs for many Chinese businesses, decreasing the amount of profit they were able to earn. The reduction and removal of tariffs following the US-China trade deal will allow these businesses to increase profit margins almost immediately.

Coronavirus impact on US-China trade deal

The signing of the US-China trade deal is a relief to businesses, investors and economists around the world, but an even bigger problem stands in the way. While the deal will ease tensions between the two countries, coronavirus is driving a wedge between them. After a global slowdown due to the trade war, many Chinese businesses are suspending their operations even longer due to the virus outbreak. That said, Steven Mnuchin, US Treasury Secretary, has said he does not expect the coronavirus outbreak to have a material impact on the phase one US-China trade deal. However, he did mention that his stance could change as more data becomes available in coming weeks. He also acknowledged that the outbreak could delay initial negotiations with Beijing on a phase two agreement, but said he was not worried about that at this point. According to Wei Jianguo, a former deputy minister responsible for foreign trade at the Ministry of Commerce, China has no plan to walk away from the trade deal due to the coronavirus epidemic. However, there is a clause in the deal which states that both parties will enter consultations if a natural disaster or other unforeseeable event delays a party from fulfilling its obligations. With millions of people under quarantine and business at a standstill in China, some critics are wondering how China will meet the demand for or fund its commitments. For more information on the effects of the coronavirus, find out how it could affect business in China.

Contributed by Peter Carleton, for Trustiics

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