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Mundo #18 - Trade Tremors

Updated: Dec 8, 2020

G'day, and welcome to edition 18 of Mundo.


This week I revisit the U.S.-China "Phase 1" trade deal struck in January. China's meagre purchase of U.S. goods, particularly in agriculture, has people nervous. Will Trump blow up the trade deal? I then take a brief look at how the Covid Crisis is accelerating Russia's economic shift from Europe to China. It makes tactical sense for now, but strategic differences present long-term vulnerabilities. Plus podcast and reading recommendations.


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Also, are you a runner? Have a look at our new project, Bunji Running. We officially launch next week!

 

Approximate reading time: 4 minutes.



Photo credit: AP PHOTO/SUE OGROCKI


China is well behind on purchases of U.S. goods. Will it matter?

China's imports of U.S. goods remains well below the agreed upon quantity that sealed the "Phase 1" U.S.-China trade agreement in January. Although the target isn't stipulated in monthly quotas, purchases are approximately 45% of where they should be on a monthly pro-rata basis.


Agricultural analysts note that China typically purchases more U.S. commodities in the second half of the year. A record corn purchase from China on July 14 gives credence to this hope. Yet with an enormous quantity to make up for by year end, there's a high likelihood that China will fail to meet its 2020 purchase targets. Will this matter?


I'd ask two further questions - would China's failure to comply alter the souring trajectory of the bilateral relationship? Secondly, will U.S. election politics prompt Trump to risk calling China out, inflaming the trading relationship and sending jitters through the stock market?


Given the breadth of recent animosity between the two powers - the South China Sea, Hong Kong, espionage accusations, 5G, and the coronavirus - ignoring a purchase shortfall wouldn't do much to improve the bilateral relationship. However, ironically, it would be a rare point of stability in an otherwise deteriorating relationship, and allow Trump to continue to claim a trade victory, however hollow that may ring.


Secondly, Trump and his administration have remained muted about China's lack of compliance in recent months. U.S. Trade Representative Robert Lighthizer has been quick to show confidence in China's eventual compliance by year-end. Trump himself has demurred, saying he has "other things in mind" when it comes to China.


There's a calculus at play for Trump - he either avoids assailing China for their low import levels, sidestepping second-order accusations that the "dealmaker in chief" cut a poor accord. Or, he berates China for "not keeping their word", pinning rural America's economic troubles on the twin tales of China's muted imports and their coronavirus missteps, as part of an effort to rally political support from American farming communities.


Many farmers are worse off than before the trade war began, wearing the cost of China's retaliatory tariffs through 2019, then suffering a steep drop in Chinese demand from COVID-19, just as the trade deal was inked.


On balance, Trump is likely to delay judgment on the trade deal, wary of the scrutiny it may attract on his self-acclaimed deal making prowess. Farmers in America's Midwest are strong Trump supporters, but even they are growing weary of his promises of a trade rebound. U.S. stock markets would reel at any hint of a revival of the trade war, denting Trump's pride in what he sees as a bellwether of his progress as president.


All of this makes the issue attractive for Joe Biden to attack, who is eager to counter Trump's accusations that he is "weak" on China.



Russia looks east

The Covid Crisis has placed acute economic and domestic political pressures on Russia's president Vladimir Putin, setting the stage for more foreign policy adventurism. The pandemic splintered Putin's popularity, as his promise that strong authoritarian leadership would provide safety and security in times of crisis fell flat. With low oil prices dragging the economy, Russia faces projections of a 6% drop in GDP growth this year.


Alexander Gabuev, who I met briefly in 2019, sees the Covid Crisis creating deeper economic ties between Russia and China, at the cost of long term strategic vulnerability.

  • The pandemic's oil demand shock, paired with the Saudi-Russia price war is accelerating a transition of Russian oil exports from the West to East, underpinned by China's economic recovery.

  • Russia is growing increasingly reliant on Huawei and ZTE's 5G hardware, without any real domestic alternatives. Security concerns remain over granting foreign firms control of Russia's 5G infrastructure, but China is viewed as the lesser threat.

  • Russian transport infrastructure investment declined as the pandemic struck, however remaining investment is being reoriented to develop commodity supply routes to the Chinese market.

This will tether Russian commodities to China's economic growth in an era of tactical political alignment between Russia and China, grounded in the United States' mutual distrust of the two powers. Yet their world views differ fundamentally, as Russia yearns to dismantle the current international order, while China seeks to bend it in its own favour. When tactical alignment dissipates, Moscow's deepening economic ties with Beijing will expose it to coercion, as Gabuev notes occurred in 2011.


Gabuev's analysis is part of a broader collection of articles from the Carnegie Moscow Center on Russia's emerging foreign policy from the pandemic.


Further listening: NPR's Throughline presented an excellent profile on Vladimir Putin late last year.

 

Something to read

Adam Tooze has a knack for neatly distilling the current political economic environment. In his latest essay, he argues that rectifying domestic and global economic imbalances requires an international political resolution. Gone are the days of U.S. unipolarity from the 1990s, where economic growth and globalisation were "geopolitically neutral".


Something to watch

ABC Australia's Barry Cassidy has a series of interviews with prominent Australians on leadership. In this episode he interviews Dennis Richardson, one of Australia's most decorated diplomats and public servants. I was struck by Richardson's humility as a leader when meeting him in 2009, just before he took up his role as secretary of Australia's Department of Foreign Affairs and Trade.

 

Thanks to everyone who has emailed me with their thoughts and ideas. Keep them coming! Forward this along to others who might find this an interesting read. Stay calm, think of others, stay healthy. Mitch

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