In an unseemly signing ceremony, with a plethora of US CEOs and government officials, 3-4 dignitaries from China, and much bravado from President Trump, the Phase One US-China trade deal was signed and presented to the world. Markets cheered. Aside from the spectacle of it all, there is some cause for short-term optimism over a thawing of US-China trade tension. The business environment stabilizes heading into an election year. The trade deal itself is a 94-page document which very few will read. The document delves into a detailed discussion of many contentious topics such as intellectual property rights, technology transfer, financial services, and exchange rate management. The trade issues were known ahead of time, and remain unresolved. The enforcement mechanism seems purposefully nebulous, with each side deciding whether the other side is delivering against the spirit of the deal. In an election year there is little incentive for re-escalation of trade tension. The most concrete part of the deal revolves around increased exports from US to China. A tremendous jump is forecast for US exports of manufactured goods, energy, agricultural products, and services. Experts are skeptical that delivery of these promises is possible. Can the US, already at full employment, increase production so dramatically? Does China have the capacity for an unlimited pick up in imports while its economy is weak?

CJF notes a few potential implications/unintended consequences from the deal:

  • China continues to revert to a command economy. After China was admitted to the WTO, the world assumed the economy would be more decentralized and politics more democratic. The opposite has happened. Directing such a dramatic increase in imports from the US entails another step up in the degree of government planning within the China economy.
  • The cost of decoupling goes back up. By ramping up all these agricultural imports from the US, the US becomes more dependent on China, not less, and increases the costs and pain associated with de-coupling in the future if interests diverge.
  • The USD could strengthen. If the imports actually manifest it would cause increased demand for dollars and upward pressure on the dollar. This is something President Trump does not want in an election year.


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1 Comment

  1. BV on January 16, 2020 at 10:41 am

    This is concise and well said. One thing that is not mentioned is China’s subversive investments in American thought systems, as well as finance stratagems. Hollywood is currently 55% owned by Chinese national corporate investors, meaning that China has invested in changing the thinking of Americans. This means that billions of dollars are being directed towards the thought systems of Americans by a Chinese government that uses slave labor, suicide nets outside corporate factories for “leapers”, locks up Muslims in open practice, and enforces total restrictions on speech of the public with impunity. Although Trump’s economic efforts with China could be considered erratic at best, in terms of strategy, the overall understanding should be: that as soon as Americans remember how to buy and sell their own goods again, they will no longer need China for anything, although China seems to need America as it expands into it. Students in Taiwan raise the American flag, because this is the inevitable understanding. The question is, will America survive the 2020 election without Chinese influences assisting in total schism, before Taiwan becomes a full revolution in China? Either way, the money is about to take a big back seat. So buckle your seatbelts money guys.

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