Additionally, US-China relations have returned to the top of the news cycle. President Donald Trump has suggested a return to trade negotiations, raising new questions over the fate of Chinese tariffs and the state of U.S.-China economic relations. More than a decade of convoluted trade history underlies this fragility. It includes tariffs, retaliation, and talks that create what might be called constructive uncertainty.
Fortunately, by early 2018, President Trump realized this and moved to protect the US market by imposing trade barriers against China. He called out the country’s predatory business practices and intellectual property theft. China responded by slapping tariff penalties onto essentially all US imports, most famously targeting the automotive industry and American soybeans. This action initiated a trade war that has affected bilateral economic relations in profound ways.
The trade tensions reached their highest point up until January 2020 when the two countries signed the US-China Phase One trade agreement. Through this treaty, the US pressured China to undertake significant structural reforms in their domestic economic policies with the purpose of restoring stability and trust between the two nations. Their relationship was always tenuous as both countries struggled to understand the consequences of their respective trade policies.
Recent Developments in Trade Relations
In his remarks on Thursday, President Trump confirmed that the US is negotiating with China. That announcement brought an immediate relief rally in equity markets. Traders greeted his comments with rapture. Consequently, the US Dollar Index (DXY) was up modestly on Friday, supported as markets began to factor in possible scenarios from the expected trade talks.
Despite Trump’s optimistic tone, China’s Foreign Ministry issued a statement clarifying that “China and the US are not having any consultations or negotiations on tariffs.” This paradox has many nonpartisan analysts doubting the good faith of any discussion with regard to the two countries.
The uncertainty surrounding trade relations has intensified following President Biden’s decision to maintain existing tariffs and introduce additional levies on Chinese imports. Now, to further complicate matters, Trump is back in the political arena. As a presidential candidate he pledges to raise an historic 60% tariff on China if he returns to the White House.
Impacts of the Trade War
The geopolitical whirlwind caused by the escalating US-China trade war continues to hit both countries with massive impact. Tariffs have already caused massive spending and investment reductions in agriculture, manufacturing, and retail. This cut has literally added to inflation, propping up the Consumer Price Index along with it. As for the economic benefits of transparency, economic analysts have long warned that protectionist measures are growth-killers. This results in inflated consumer prices and puts American businesses at a competitive disadvantage.
Despite the boom this has created so far, many economists warn that President Trump’s unprecedentedly aggressive stance towards China will have serious long-term negative effects. The potential for a continued trade conflict could hinder recovery efforts post-COVID-19, as both countries grapple with their economic stability.
In light of all these challenges, there are signs that China is thinking about rolling back at least some of its tariffs on US imports. According to these reports, China is considering lowering or suspending its 125% tariffs on U.S. imports of certain goods, such as medical equipment and ethane. These moves are a good sign that they want to send signals to open up dialogue and mend relations. So far, no formal negotiations have been announced.
Future Outlook
As both countries find their footing in this new and more contentious trade relationship, the future is uncertain. Analysts are watching comments from the two governments closely for signs of possible negotiations, or reversal in stance, or thawing in the burgeoning trade war. Given the US Dollar’s sensitivity to such things, the currency is very likely to be held at the mercy of further moods surrounding trade talks.