A US-China trade deal won’t be a win for global markets if Beijing shifts its trade surplus to other countries

A possible Sino-US trade deal is widely regarded as a positive step for the world economy, as a tit-for-tat trade war between the two economic giants will only lead to shrinking incomes for both economies, cause supply chain disruptions and erode corporate profitability.

US President Donald Trump’s grievance with China is America’s bilateral trade deficit, which currently stands at US$413 billion and accounts for 85 per cent of America’s total current account deficit. Therefore, it is possible that any trade deal with China will include a commitment from Beijing to correct this bilateral trade imbalance with the US by buying more American goods and services – with quantifiable targets and defined time frames.

The starting point is the dollar’s status as a global reserve currency and international monetary standard, and the US current account deficit is the only mechanism through which the global supply of dollars can be increased. This is why a global economic boom often coincides with a higher US current account deficit, while global recessions often see the US current account moving in the opposite direction.