It’s clear that a US-China trade deal will not be quick, or easy

Hammering out one big trade treaty between two different systems is virtually impossible. The US and China are more likely to produce a series of treaties focusing on different aspects of trade — and this could take decades

Richard Harris

Published: 11:00pm, 16 May 2019

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It was a shock to the market when US President Donald Trump tweeted last week that punitive tariffs on US$200 billion worth of imports from China would rise from 10 per cent to 25 per cent. The phoney war was over. The battle for free trade was about to begin.

The biggest surprise is not that Trump launched a tweet from the left field, nor that the US authorities enacted such a measure without any form of legislative check on his decision.

Rather, it is the stock markets’ delayed reaction to what should have been bad news. I had expected markets to be spooked enough to come off between 5 and 10 per cent in the immediate aftermath but they held up surprisingly well despite prices around the world at 2019 highs, until the latest sell-off.

It may be that nobody believed Trump – which is a reasonable guess. It may be that the markets did not believe the tariffs would make much difference. The total amount of world merchandise exports at the end of 2018 was US$19.48 trillion, according to the World Trade Organisation.

Exports rose by 10 per cent in that year. To put this into perspective, this increase in trade alone is hundreds of billions of dollars more than the threat of tariffs so far. On a global basis, tariffs do not make that much difference. World trade is affected but not threatened.

But from a narrower perspective, it is a big deal. China will continue to be hurt as it is still an exporter and depends hugely on the West. And you can be sure that Europe and other trading partners will not give China an easy ride.

Why should they if they see an opportunity for profit? US consumers will also pay higher prices. Larry Kudlow, the president’s trade adviser, admitted as much last Sunday.

Until Trump was elected, most countries were too diplomatic, too understanding and too slow to appreciate that China had moved into the role of an assertive trading partner

Trump articulated a nagging unease in the US that they have carried the rest of the world for a long time. For 70 years, the US has taken a magnanimous view on trade, allowing largely unfettered access to its markets.

Free trade has been hugely beneficial to the world economy and, even though tariffs are a great way for governments to raise money, years of low tariffs have been a great boost to the global economy.

Low tariffs and largely free trade have been critical to China’s development. The US and the rest of the world viewed China’s economic rise with benevolence, taking advantage of cheap labour that coincided happily with the need to massively scale up production into the digital revolution.

How a trade war could boost European stock markets

Until Trump was elected, most countries were too diplomatic, too understanding and too slow to appreciate that China had moved into the role of an assertive trading partner, imposing a host of non-tariff barriers to support its own industry.

The rise in tariffs means that companies will begin trading tactically, adjusting their supply chains, substituting, using third parties and adjusting their processes to minimise the impact of the tariffs.

China has made strong statements of retaliation but, in reality, this is tough to do as there are a lot fewer US imports to attack – partly as a result of Chinese restrictions in the past. It is likely that it is a case of when, not if, Trump’s tariff tantrums will make China open up – something that is actually fundamentally good for the Chinese economy.

The present difficulty is that the trade negotiators are trying to harmonise two different trade systems. The US want the Chinese to enact laws against the theft of intellectual property. This was a good tactic for China when the country was developing, but is not acceptable now that it is a developed country and a trading competitor.

As China develops its own intellectual property, in some ways, this will become easier to deal with. Other areas are harder, such as state financial aid to companies that compete with foreign firms. Such financial support, which is banned under most trade treaties, is nevertheless a cornerstone of a command-and-control economy.

How IP, censorship have haunted the history of China-US trade talks

It is therefore almost certain that we will not see one big trade treaty. The ideal of a shake of the hands, a signing ceremony and going back to what we had before is not going to happen. We are more likely to see a series of treaties, with the early ones being broad brush strokes and general.

The most likely model is that of the arms limitation talks between the US and Russia in the 1970s. Negotiators will deal step by step on different trade issues, concluding a series of treaties, each dealing with different part of the trade spectrum.

Chinese Vice-Premier Liu He and his negotiating team had better get used to a long shift – this one could take decades.

Richard Harris is chief executive of Port Shelter Investment, and a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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