On Inauguration Day 2017, the United States entered into a new era of economic policy toward China. Led by the commercially hawkish, nationalistic tone of the Trump administration, U.S.-China trade underwent a sweeping overhaul. Everything from agricultural subsidies to intellectual property theft came under intense scrutiny. The result was an extended period of saber-rattling, tough talk, and tit-for-tat tariff exchanges.
So which issues are likely to impact the annual $660 billion two-way trade relationship? Let’s take a look at three factors that will play key roles in shaping commerce between the U.S. and China for years to come.
1. Coronavirus (COVID-19) Fallout
Early 2020 brought the most severe economic challenge in a decade: the coronavirus (COVID-19) pandemic. Global markets were turned upside down seemingly overnight, with equities, currencies, and commodities experiencing unprecedented volatilities. Suddenly, the U.S.-China trade war was put on the back burner, and a deep global recession appeared inevitable.
The humanitarian cost of COVID-19 has been enormous, and so has the economic price. The world’s financial system came under extreme pressure as uncertainty dominated the global business landscape. In the U.S., unemployment levels spiked as the U.S. Federal Reserve (FED) and the Trump administration turned to massive quantitative easing (QE) and stimulus programs to turn the tide.
Amid the chaos, several questions surrounding post-COVID-19 U.S./China relations began to emerge:
- Will the U.S. hold China financially responsible for the pandemic?
- How will a significantly stronger USD impact U.S. exports to China?
- Will both sides reduce existing tariffs to jumpstart global economic activity?
As of this writing, the COVID-19 situation remains fluid. However, upon its eventual resolution, the questions above may play key roles in crafting future U.S.-China trade relations.
2. IP Theft
A 2017 report from the National Bureau of Asian Research estimated that the U.S. economy loses between $225-600 billion annually in costs related to counterfeit goods, illegal software, and trade secret theft. Subsequently, stopping Chinese intellectual larceny has been a constant talking point from the Trump administration.
By signing the “Phase One” trade agreement in January 2020, China pledged to publish an action plan to mitigate intellectual property (IP) theft. The plan was to establish benchmarks for enforcement of policy against IP theft and harsher penalties.
IP security will be a major issue that shapes the future of U.S.-China trade. If significant progress is not made in this arena, a large-scale rollback of existing tariffs on Chinese exports may not be feasible. As we move past the 2020 U.S. electoral cycle, China’s commitment to IP security will be a key part of relations.
3. Agricultural Commitments
In 2017, China was the United States’ second-largest consumer of U.S. agricultural exports. Due to heightened tariffs, Chinese consumption of U.S. ag products dropped dramatically from 2017 to 2020.
A major facet of the “Phase One” trade deal was China’s commitment to purchasing U.S. agricultural goods. In the deal, the following pledges were made:
- China committed to annual purchases of at least $40 billion in U.S. agricultural and related products through 2022.
- China agreed to eliminate many non-tariff export barriers and improve the structure of the U.S.-China ag exchange.
Of these two issues, China’s commitment to purchase $40 billion annually in ag products is the most important. In the past, these types of commitments have not been honored; should purchases fall dramatically short, further progress on the commercial front will likely be very difficult.
Staying on Top of U.S.-China Trade Relations Is a Full-Time Job
For most of the past four years, the U.S. and China have exchanged blows in an extended trade standoff. Tariffs, negotiations, and strong rhetoric have greatly affected the prevailing market dynamic of many assets. With the onset of the COVID-19 pandemic, the whole game changed.
With so many factors at play, staying on top of U.S.-China trade relations is a full-time job. To learn more about what is happening on the trade war front, check out Daniels Trading’s Insider Market Advisory. Featuring expert analysis, actionable trade ideas, and timely insights, the Insider Market Advisory is a great way to stay abreast of the ever-changing global marketplace.
