Is the
U.S. - China Trade Deal a Relic of History?
By the Curmudgeon
Remember the daily stock market celebrations each time there was any
positive news on a U.S.-China trade deal?
The market discounted that event and rallied so many times Ive lost track. And
it never gave back those gains when the trade deal did NOT live up to
expectations.
As of now, the Phase 1 trade agreement signed by the worlds two largest
economies in January appears to be a HUGE DUD! China has only bought 45 per
cent of the amount of goods required by the deal in the first five months of
the year, research from the Peterson Institute of International Economics
showed.
The United States and China signed their phase one trade
deal in January. Photo: Xinhua
.
China- U.S. tensions continue to flare over issues ranging from the
draconian Hong Kong security law to destroying China telecom companies Huawei
and ZTE, to China not buying enough U.S. products (more below). Many experts agree that the superpower relationship
between China and the United States is at its lowest level in decades.
The U.S. Chamber of Commerce and over 40 trade associations this week urged
top American and Chinese officials to redouble efforts to implement the
trade deal in spite pandemic-related strains.
In a letter to U.S. Treasury Secretary Steven Mnuchin, U.S. Trade
Representative Robert Lighthizer and Chinese Vice
Premier Liu He, the groups urged a significant increase in Chinas purchases
of U.S. goods and services.
They said combating the novel coronavirus pandemic and restoring global
growth depended in part on successful implementation of the U.S.-China trade
deal, which helped defuse a nearly 18-month trade war marked by tit-for-tat
tariffs.
The agreement called for China to purchase $200 billion in additional U.S.
goods and services over the next two years.
Accelerated implementation of the trade deal would help both countries
while paving the way for Phase 2 talks on other key issues such as subsidies,
cybersecurity and digital trade, officials said.
Amid increasing bilateral tensions across the relationship, working
together to improve trade and grow commerce can provide important benefits to
both economies and help to improve relations, they wrote in the letter.
Jeremie Waterman, who heads the
Chambers China Center, said some progress had been made on structural issues
and purchases of farm goods, but China needed to step up its purchases of U.S.
manufactured goods, services and energy to meet its targets now that its
economy was starting to recover from the pandemic.
There are areas where we see less progress and where we think its critical
that both sides redouble efforts, Waterman said.
U.S.-China tensions have spiked in recent months over the origins of the
coronavirus outbreak and passage of a new national security law that limits
Hong Kongs autonomy.
President Donald Trump had said that decoupling the two economies remains
an option, and his trade adviser Peter Navarro jolted markets last month when
he said the U.S.-China trade agreement was over, although he quickly
backtracked.
White House Chief of Staff Mark Meadows said on Monday that President Trump
was considering several executive orders targeting China and manufacturing but
gave no details.
The U.S. industry groups listed specific recommendations in an annex to the
letter, including increased purchases of U.S. aircraft and components, cars and medical devices, as well as cloud computing
services and U.S. energy products.
Many believe Trumps motivation for the trade deal was to decrease the U.S.
trade deficit with China, and indeed it has narrowed. China continues to
purchase American farm goods, seen as crucial to Trumps plans to win
re-election in November, but these are widely viewed as insufficient.
China has grown more belligerent on the international stage since the first
25 per cent tariff was placed on US$34 billion of goods on July 6, 2018,
engaging in trade and geopolitical disputes with nations including India,
Canada and Australia, while drawing widespread condemnation from a series of
Western governments for rolling out a sweeping national security law on Hong
Kong, seen by many as an erosion of the citys autonomy.
The new law punishes what China describes broadly as secession, subversion,
terrorism, and collusion with foreign forces with up to life in prison and
allows mainland security agents to operate officially in Hong Kong for the
first time. Hong Kongs opposition camp said on Sunday that over 600,000
citizens in the Chinese-ruled city cast ballots over the weekend in primaries
it cast as a symbolic protest vote against tough national security laws imposed
by Beijing.
Many say the city is increasingly being run from Beijing. Mainland Chinese
officials have been appointed as the citys top national security adviser and
head of a new national security agency in Hong Kong that will have overarching
authority, including an enforcement role in the most serious cases.
As Victor and I have previously stated,
one country two systems has evolved into one country one system (more in a
follow up article later this week with Victors unhedged opinions).
.
What is alarming is that the Sino-U.S. relationship is one of the most
important bilateral relations in the world, but is facing the most serious
challenges since the establishment of diplomatic relations [in 1979], said
Foreign Minister Wang Yi, in a speech in Beijing on Thursday.
As the U.S. moves closer to Novembers general election, even more
uncertainty lies ahead for the geopolitical and economic relationship, analysts
said.
In the short term, the rapidly changing political landscape in the US
could shift trade war calculations. President Trumps declining political
prospects means that China might be content to wait out the Trump presidency
in anticipation of dealing with a more conventional Biden administration in
January, said Stephen Olson, senior fellow at the Hinrich
Foundation and former U.S. trade negotiator.
Over the longer term, however, the fundamental issues remain the same.
Given how profoundly different the U.S. and Chinese economic systems are, the
degree of trade and investment integration that has taken place over the past
two decades was probably unrealistic. Although an across-the-board economic
decoupling is impossible and in neither countrys interest, some degree of
decoupling is inevitable.
.
Meanwhile, the NY Times reports that Iran and China have
quietly drafted a sweeping economic and security partnership that would clear
the way for billions of dollars of Chinese investments in energy and other
sectors, undercutting the Trump administrations efforts to isolate the
Iranian government because of its nuclear and military ambitions.
The partnership, detailed in an 18-page proposed agreement obtained by the
Times, would vastly expand Chinese presence in banking, telecommunications,
ports, railways, and dozens of other projects. In exchange, China would receive
a regular and, according to an Iranian official and an oil trader, heavily
discounted supply of Iranian oil over the next 25 years.
The document also describes deepening military cooperation,
potentially giving China a foothold in a region that has been a strategic
preoccupation of the United States for decades. It calls for joint training and
exercises, joint research and weapons development and intelligence sharing
all to fight the lopsided battle with terrorism, drug and human trafficking
and cross-border crimes.
Irans desperation from U.S. sanctions has pushed it into the arms of
China, which has the technology and appetite for oil that Iran needs. Iran has
been one of the worlds largest oil producers, but its exports, Tehrans
largest source of revenue, have plunged since the Trump administration began
imposing sanctions in 2018; China gets about 75 percent of its oil from
abroad and is the worlds largest oil importer, at more than 10 million
barrels a day last year.
At a time when the United States is reeling from recession and the
coronavirus, and increasingly isolated internationally, China senses
American weakness. Do you?
The United States will continue to impose costs on Chinese companies that
aid Iran, the worlds largest state sponsor of terrorism, a State Department
spokeswoman wrote in response to questions about the draft agreement.
End Quote:
We are in a situation where the Chinese Communist Party controls the
police, and the police controls Hong Kong, said veteran pro-democracy
legislator James To, who has monitored policing and security matters for
decades. It is not the way Hong Kong is supposed to work or has worked up
until recently. Hong Kong has become a security police state.
.
Stay calm, safe and be healthy. Good
luck and till next time
...
The Curmudgeon
ajwdct@gmail.com
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the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned
(since 1971) to profit in the ever changing and arcane world of markets,
economies and government policies.
Victor started his Wall Street career in 1966 and began trading for a
living in 1968. As President and CEO of Alpha Financial Technologies LLC,
Sperandeo oversees the firm's research and development platform, which is used
to create innovative solutions for different futures markets, risk parameters
and other factors.
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