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Trade Uncertainty on the Rise
The likelihood of a second trade deal this year with China appears to have materially faded—if it’s not off the table altogether. President Trump recently relayed he isn’t currently focused on a phase-two deal. To be fair, a phase-two deal may have already been dead in the water for 2020, given the next round of negotiations was intended to aim at some of the bigger bones of contention between the US and China. Then, too, Beijing officials have long stated their preference for a wait-and-see approach to ongoing negotiations—pending the US’s November election outcome. But now, it seems an even longer-term delay is possible—with potentially significant global ramifications. The US finds itself negotiating on a proliferating number of geographical fronts, while other countries have increasingly felt pushed to choose sides: Beijing or Washington.
From a market perspective, the US's phase-two goal is ending what it perceives to be China’s market-distorting practices, like subsidizing state-owned enterprises. But there’s much more to it than just economics or markets. There are also disagreements over China’s relationship with Hong Kong, territorial claims in the South China Sea, cybersecurity considerations and human rights concerns. All of which has been amplified by COVID-19 and sharp words from both sides about its origins.
The dispute’s ongoing iciness and global reach could force trading partners to take sides—the Huawei debate clearly illustrates that possibility. The UK recently announced it would no longer allow Huawei equipment to be purchased for 5G networking in the country—which some estimate could delay the 5G rollout by some 18 months. Australia and Japan have also sided with the US in declining Huawei technology, while others countries, including Canada, France and the Netherlands, have yet to weigh in. Much of the EU is split on how to proceed—though Sweden, Ireland and Hungary have moved forward with building some infrastructure with Huawei equipment. India has considered banning use of Huawei’s equipment as border disputes with China heighten.
For the US, the fact that China is not the only country with which it’s currently negotiating only complicates the picture. The US and UK want a new trade deal following Brexit. Washington seeks increased access for its agricultural exports within the UK and a potential reduction in taxes technology companies from the US pay to operate in the region. Meanwhile, the US is weighing new tariffs against the UK (and other European countries), which would impact planes, beer, cheese and gin, among other goods. A deal seems unlikely until after the US election—and probably after the UK secures a deal with the EU.
There is similar uncertainty around negotiations with India. And then there is the US-Mexico-Canada Agreement, which went into effect on July 1—though with meaningful uncertainty still around steel, aluminum, energy and labor reforms.
With the US election’s outcome still very much up in the air, few countries have an incentive to negotiate with the current administration—including China, which brings us back to where we started. For now, China and the US are operating under the phase-one deal, which was expected to increase US exports to China by some $200 billion by 2021—though whether that proves doable, given the current pandemic and accompanying economic malaise, remains entirely to be seen.
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