MUNDO #2 - A trade truce
Updated: Jul 24, 2020
Thanks for your feedback and support from last week’s first edition. I really appreciate it. Please keep the questions, comments, recommendations and thoughts coming!
Approximate reading time: 3 minutes.
US-China Phase 1 Trade Deal
Donald Trump formally signed the “Phase 1” trade deal with Xi Jinping’s trade representative Liu He in Washington, D.C. on Wednesday (back story here). The agreement covers a narrow set of issues including the protection of intellectual property, forced technology transfer, and a purchase agreement (an extra $200bn in Chinese purchases of US goods and services by 2021) – without addressing the thorniest issues irritating the US – China’s industrial subsidies and trade in digital services. This is a lot of jargon, and I’d love to discuss it further if you want to email me about it. Overal
l, this is a tactical truce amidst a still broadly deteriorating relationship, led by a growing technology rivalry. Tactical because Trump’s now in an election year and he wants to boast of a trade win to farmers in the Mid-West (votes), and his backers in industry and Wall Street (campaign $$). China’s President Xi Jinping is happy to get Trump off his back, evidenced by Chinese media’s carefully calibrated, muted response to the agreement. Meanwhile, Xi will continue redirecting their economy on a long-term trajectory of technology independence in Artificial Intelligence and 5G.
However, don’t be fooled by the announced tariff reductions. The prevailing tariff rate still remains at around 19% on roughly two-thirds of US imports from China, 16% higher than pre trade war levels. For now, the US has embedded higher tariffs - prolonging the distortion of trade flows, increasing the cost of goods for US manufacturers and consumers, incentivising economic decoupling, and normalising tariffs as a blunt tool for countries to negotiate with.
As always with Trump, tail risks remain that could throw the deal in jeopardy at any time. This happened during their negotiations in May last year, and separately with Mexico as their USMCA trade agreement was being finalised. Triggers that have provoked Trump before were political (such as the escalating impeachment investigations) and economic (growing uncertainty in the Mid-West). So, look out for bad news weeks for sudden shifts in his attitude. Progress on Chinese purchases of US goods and services as per the purchase agreement is one to watch, as it’s viewed by market analysts as highly ambitious.
This week saw a sudden power play in Russia, as President Vladimir Putin proposed changes to the Russian constitution, and suddenly elevated the largely unknown Mikhail V. Mishustin to prime minister. Putin will remain president until 2024, and this move appears aimed to unsettle rivals looking to succeed him, while setting a path for his continued power beyond 2024.
As I type this, Trump’s impeachment is moving to the US Senate, where the formal trial will be held. The Republican controlled Senate is likely to move the trial quickly – perhaps over only a few weeks – before coming to a vote. Remember that a two-thirds majority is needed to remove a sitting president, which would require at least 20 Republicans to break ranks and vote for Trump’s removal. Despite the evidence presented against Trump so far, at no stage has this seemed likely. With additional evidence unlikely to be presented in the Senate, and with Republicans remaining supportive, Trump will remain in office.
From Last Week...
The Economist published a great piece on Trump’s Iran strategy, and how it risks sinking more resources into the Middle East when most strategists are calling for greater focus in Asia. Protests swelled again in Iran’s capital Tehran over the downing of the commercial flight that I discussed last week. Tehran’s military admitted it was their mistake.
For the Aussie readers, it’s worth noting just how big the Australian bushfires are in the US media at the moment. The New York Times’ “The Daily” podcast featured an episode on it this week.
Have a great weekend, and please feel free to forward along to others who might find this an interesting read.