Podcast Summary
Understanding the Current State of US-China Trade Relations: The US and China are imposing tariffs on each other's goods, affecting various sectors and leading to debates about the severity and label of this situation, with potential far-reaching consequences.
We are currently witnessing significant trade-related challenges that are impacting markets and the economy. The US and China have implemented tariffs on billions of dollars' worth of goods, affecting various sectors including agriculture and technology. The situation is complex, with debates ongoing about the definition and severity of this situation, with terms like "trade war," "trade skirmish," and "trade tiff" being used interchangeably. Regardless of the label, it's clear that this is a critical issue with potential far-reaching consequences. To better understand the situation, we're fortunate to have Brad Setzer, the Stephen A. Tannenbaum Senior Fellow for International Economics, joining us to provide insights and clarification on the current state of trade relations.
A potential trade war between US and China: The US-China dispute involves proposed tariffs and sanctions, differing from standard trade remedies and following an uncertain negotiation process
The ongoing dispute between the US and China could be considered a trade war if the proposed tariffs are implemented by both parties. This is different from standard trade remedies, such as antidumping or safeguard cases, which follow a specific process within the rules of the World Trade Organization (WTO). The ongoing 301 case, however, is aimed at practices that the US argues hurt its economy but fall outside China's WTO commitments, resulting in unilateral tariffs and sanctions. The uncertainty surrounding a potential compromise before the tariffs are enacted remains high, as it's unclear what concessions would be acceptable to the US administration. A trade war, it's important to note, is not a shooting war but rather a period of economic hostility.
Flexibility in Choosing Sectors for Tariffs in 301 Investigations: In 301 investigations, the US has more freedom to choose sectors for tariffs compared to dumping cases, and focusing on the bilateral trade deficit is not a productive way to evaluate trading relationships.
In a dumping case, countries target sectors where unfair practices occur to impose tariffs. However, in a 301 investigation, such as the one against China, the US has more freedom to choose sectors for tariffs without being prompted by a specific industry. The focus on the bilateral trade deficit, as Trump often does, is not a productive way to evaluate trading relationships, as trade does not have to be balanced between individual countries. Instead, the global trade deficit indicates the US's external borrowing or investment. If tariffs are implemented in a trade war, there would be a comment period for industries to lobby for changes, followed by negotiations. Tariffs do not have to be introduced at the end of the comment period.
Impact of US-China Tariffs on American Consumers and Trade Diversion: Tariffs between US and China could increase US GDP by 5 basis points due to price hikes for certain goods, but trade diversion to untariffed regions may offer opportunities for affected industries.
The implementation of tariffs between the US and China could lead to significant price increases for American consumers in certain product categories, amounting to around 5 basis points of US GDP. However, there may be opportunities for trade diversion to untariffed parts of the global economy. China has targeted US exports in sectors like aircraft, soybeans, and autos, with some exemptions, and the impact on these industries will depend on how Chinese buyers respond. China's ambition to build a homegrown aviation industry on par with Boeing or Airbus is central to its China 2025 plan, but the plausibility of achieving this goal remains an open question. The China 2025 plan identifies advanced manufacturing technology sectors for development, including medical equipment, semiconductors, aviation, and next-generation vehicles.
China's industrial policy goals and technology transfer requirements: China's industrial goals and technology transfer requirements are concerns for US, as they deviate from typical international norms and can limit foreign companies' access to their markets
China's industrial policy goals, which include increasing domestic production and market share in cutting-edge sectors, can be seen as a legitimate trade concern. While US tariffs may not necessarily hinder China's long-term ambitions of import substitution in some industries, such as aerospace, China's requirement for technology transfer from foreign companies seeking to participate in the Chinese market remains a contentious issue. This practice, which China is not explicitly prohibited from under its WTO obligations, can be seen as a deviation from typical international norms. The US has raised concerns about this issue in the 301 complaint, which led to the imposition of US tariffs on Chinese goods.
Transfer of Technology to Chinese State-Owned Firms: Foreign companies often need to transfer technology to Chinese state-owned firms to do business in China, particularly in tech and electric vehicles industries.
In order to do business in China and supply the Chinese market, particularly in industries like technology and electric vehicles, it is often necessary for foreign companies to transfer technology to Chinese state-owned firms as a condition of the deal. This is not a matter of formal government policy but rather commercial negotiations between companies. Additionally, China's vast holdings of US treasuries are primarily a reflection of its reserve holdings, and the amount of treasuries China holds has historically moved in line with the evolution of its reserves. However, China's reserves are not growing rapidly at the moment, so it is not currently a significant buyer of treasuries. Therefore, while China's treasury holdings are a major topic in discussions about the US-China trade deficit, the majority of financing for the US deficit is coming from other sources.
China's role in the US Treasury market is more nuanced than just being a lender: China's actions in the US Treasury market, such as shifting portfolio or selling treasuries, can have unintended consequences and far-reaching impacts, making it crucial to understand the complex dynamics of the market.
The relationship between China and the US Treasury market is more complex than the common perception of China as a large lender to the US. While China does hold a significant amount of US Treasuries, its actions in the market can have unintended consequences. For instance, during the crisis, China shifted its portfolio from agencies to treasuries, causing problems in the agency market. However, the Fed's intervention in buying agencies stabilized the market. If China were to sell treasuries, it could cause short-term market disruptions, but the Fed could respond by adjusting its monetary policy. Moreover, China's greatest leverage comes when it buys assets other than treasuries, such as agencies or corporate bonds, which the Fed does not typically buy. Therefore, it's essential to recognize that the dynamics of the US Treasury market are not as simple as a binary relationship between China and the US, and the consequences of China's actions can be far-reaching and multifaceted.
China's Influence on Credit Spreads and Trade Wars: China can impact credit spreads and agency treasury spreads, but their most significant leverage in a trade war is uncertain. Past trade conflicts have left lasting impacts, and current tariffs could lead to negotiations or escalation. It's predicted that both sides will implement tariffs, but it may be challenging for the US to back down.
China has the ability to influence credit spreads and agency treasury spreads more easily than the Fed, but this isn't China's most powerful source of leverage in a trade war. The current tariff threat between the US and China could result in negotiations leading to a deal or the implementation of tariffs with no further escalation. Past trade fights have left permanent scars on the global trading system, and current tariffs stem from conflicts that date back decades. If the trade war escalates, both sides could retaliate in various ways, and it's uncertain how long the effects of these tariffs will last. Based on the discussion, it's predicted that both the US and China will implement the tariffs and then it will stop, but it may be challenging for the Trump administration to convince the president to step back.
Potential consequences of US-China trade tensions: Trade tensions between US and China may cause market volatility and significant impacts on the global economy, including possible selling off of US bonds by China
The ongoing trade tensions between the US and China may lead to a trade war, but it's unlikely that there will be further escalation beyond the initial round. However, even if there is no escalation, the impacts on the global economy could still be significant. Brad Sitzer, a senior fellow for international economics at the Council on Foreign Relations, discussed the potential consequences of the trade tensions, including the possibility of China selling off its US bond holdings. The market reaction to the trade tensions has been volatile, with optimism driving up markets on some days and fears of imminent trade wars causing declines on others. Ultimately, it seems that the market's perception of the trade situation shapes the narrative rather than the other way around. Despite the complexities and potential consequences of the trade tensions, it's important to remember that the situation is still evolving and that there are many nuances to consider.
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