The keys to negotiations in the US. and China to end the trade war

Washington wants Beijing to value its currency and withdraw its technology transfer policy while China can increase the purchase of American products

The new round of negotiations on trade between the United States and China, which will be held this Wednesday and Thursday in Washington to avoid the tariff war, will be a major protagonist: the yuan.

The experts point to the Chinese currency as the main topic of discussion, since it is one of the issues that triggered the hostility of the US President, Donald Trump, for the Asian giant, and is also one of the points on which the US could to win a small victory to end the tariff war. However, it will not be the only topic of debate, as it will also deal with transfers of technology, disguised subsidies and, of course, import duties.

The talks will mainly focus on how they deal with the evolution of the yuan, "says Robin Brooks, chief economist at the International Finance Institute, which is how the appreciation of the Chinese currency will be achieved President Trump has repeatedly accused Beijing of artificially reducing the yuan to improve the competitiveness of its exports and gain market share in world trade The president has pointed to this policy as one of the responsible for the United States last year has a trade deficit with China of $ 375,600 million .

Currency war
The problem is that the imposition of rates of up to 25% to about US $ 50,000 million in imports of Chinese products, and the threat to raise this figure to US $ 250,000 million, coupled with the progressive rise in interest rates by the Federal Reserve they have only aggravated the problem.

"The Chinese currency falls like a rock and ours is rising, and this puts us at a disadvantage," Trump said in an interview on CNBC. And this means that the US trade deficit with China will grow by 8.3% between January and June, further expanding the gap at the global level.

Therefore, Trump can agree to a minimum agreement in which Beijing undertakes to support an increase in the value of the yuan, given that the cancellation of the fines would create an additional appreciation. In this way, the Republican party would have a victory, however small, that it could sell during the next mid-term parliamentary elections in November. This would also be the easiest exit for China.

The problem is that the yuan may not be depreciated as artificially as in the past, since the current low price also responds to the slowdown of the domestic economy and to the easing of monetary policy, which is necessary for the effects of the trade war. to counteract. So it remains to be seen what Beijing can do exactly.

Moreover, China has indicated that it "will not repeat the mistakes of Japan", referring to the so-called Plaza agreements signed in 1985, for which Tokyo agreed with the United States and other European powers to adjust their currencies which led to an appreciation. of the yen of more than 50%, resulting in a strong stagnation.

However, it is clear that China has something to offer to the United States. to end the commercial war. The White House said it expects China to make "concrete proposals" in this regard and Trump believes that "you can not lose a trade war" when your country exports only one dollar to China for every four dollars it imports from the Asian giant. .

This could lead to a second problem: the transfer of technology. The draconian regulation of the Asian country forces companies who want to establish themselves to relinquish their technology to a local partner, who then uses this advantage to compete at lower cost on world markets. Although this advantage will be very difficult for China, the country is increasingly technologically advanced, so that it could soften the rule in certain sectors with minimal costs to facilitate an agreement.

On the other hand, the United States also wants to avoid state aid to Chinese companies, both directly and through public banking, through loans that are not ultimately repaid. This makes it possible to reduce the fixed costs considerably and to flood the international market with Chinese products.

In this case China could make concessions, because the country itself has realized that this type of policy leads to a focus on products that offer increasingly less profit margin. The technological progress that Beijing is trying to implement is even aimed at reducing the weight of sectors such as steel, glass or cement, precisely those areas that Trump wants to protect most.

Finally, both countries want to avoid escalation in the tariff war that harms the interests of both (as both Beijing and the US Federal Reserve have acknowledged), although the two powers are very reluctant to give their arm. On the one hand, Washington points out that it is only "the balance between the playing field" in trade relations; on the other hand, China replies that it "does not accept any form of unilateral trade protectionism" and will set the rates "mutually" if the US does the same

However, both countries have problems to continue the escalation of the sanctions. On the one hand, Beijing has already taxed one third of the US imports (much of it, energy, damaging its own competitiveness), while Washington can still raise them to half a trillion dollars, something that Trump already has threatened to do.

On the other hand, the US. it has more pressure from the point of view of voters, in case the commercial escalation leads to an unsustainable situation. This could lead to a consensus solution in which both countries reverse the tariff increase and in exchange will buy more American products from China. However, it will be difficult to meet the expectations of the White House, which wants to close the trade deficit with China with US $ 100 billion.

What the United States wants …
Donald Trump has accused China of artificially reducing the yuan to boost exports. That is why he wants to use the tariffs as a lever to force Beijing to increase the value of its currency, thereby improving the trade balance with the Asian country.

Washington demands that China put an end to the regulations that require foreign companies that want to be active in the country to relinquish their technology to a local partner, and then compete in the rest of the world.

Beijing also has to end the subsidy policy towards strategic sectors, through loans that will not be repaid later. This policy reduces costs and expels western products from the market in sectors such as the steel industry.

Finally, China should fall back on the imposition of tariffs. While American tariff barriers They are widespread across many products, Beijing reprisals are concentrated in very few goods, particularly harmful cars & soybeans.

And what China claims
China wants to prevent it from weakening its currency because it can deposit its economy (very dependent on exports) in stagnation, as happened with Japan. However, an agreement with the US. It would raise the price of the yuan.

With the plan & # 39; Made in China 2025 & # 39; Beijing wants to position itself as the world leader in areas such as robotics, biotechnology, electric and autonomous vehicles or artificial intelligence. That is why it wants to continue the technology transfer, although it might limit it in some sectors.

China officially rejects the use of subsidies, although the fact that there are preferential loans to certain companies is unmistakable. However, Beijing could stop promoting certain sectors where profit margins are getting smaller.

The Asian giant wants to force Trump to undo the imposition of tariffs. President Xi Jinping has offered to increase his purchases of American products, although it remains to be seen whether this is enough to convince Trump.

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