In 2016, Republican U.S. Presidential candidate Donald J. Trump built a campaign on a central theme of American prosperity through rebalancing foreign trade. To accomplish this goal, Trump proposed a complete overhaul of the North American Free Trade Agreement (NAFTA) and an intense review of U.S. policy toward China. Upon winning the presidency in November 2016, Trump's agenda was one step closer to becoming a reality.
Throughout the Trump administration's initial term in office, they prioritised both NAFTA and the trade relationship with China. In an attempt to revise NAFTA, the United States Mexico Canada Agreement (USMCA) was crafted and promoted as the new standard of North American trade.
In addition to USMCA, Trump sought a brand-new trade arrangement with China. Citing concerns over a large trade imbalance, currency manipulation and intellectual property theft, the Trump administration actively pursued Chinese cooperation. Subsequently, a hot trade war between the two nations ensued that dominated the international economic landscape throughout 2018 and 2019.
The U.S./China Trade Relationship
On a global scale, there are few trade relationships more valuable than that between the U.S. and China. In fact, the U.S./China two-way goods exchange is estimated to be worth US$659.8 billion annually, almost 5% of the world's aggregate foreign trade. Due to the fact that both the U.S. and China carry top three international rankings in gross domestic product (GDP) and exports, the lofty valuation comes as little surprise.
Since the turn of the 21st century, the U.S./China trade relationship has grown dramatically. According to figures established in 2018, the U.S. is the largest export destination for China and China is the U.S.'s third largest. Below are a more noteworthy facts as of 2018:
- U.S. goods exports to China totalled US$120.3 billion, up 72.6% from 2008.
- Chinese goods exports to the U.S. totalled US$539.5 billion, up 59.7% from 2008.
- The top U.S. exports to China were aircraft, machinery, electrical machinery, medical instruments and vehicles.
- The top Chinese exports to the U.S. were electrical machinery, machinery, furniture, toys, sports equipment and plastics.
On an annual basis, the trade balance between the two countries is skewed. The U.S. routinely runs a deficit with China, measuring in the hundreds of billions of dollars. For the year-end 2019, this figure totalled -US$345.616 billion, down almost US$74 billion year-over-year.
One of the largest drivers of the U.S./China trade imbalance lies in the technology sector. In 2018, America imported US$186.5 billion worth of computers and electronics from China, while only exporting US$17.9 billion of such products to China. Even though the tech sector isn't the only driver of the United States' trade deficit with China, it is certainly an important one.
Tariffs And Negotiations
Over the course of 2016, Republican Presidential candidate Donald J. Trump frequently addressed the need for change in U.S./China trade. At his 2 May 2016 campaign rally in Fort Wayne, Indiana, Trump took a hardline stance on the issue:
"We can't continue to allow China to rape our country and that's what they're doing. It's the greatest theft in the history of the world."
In early April 2017, Trump held a meeting with Chinese President Xi Jinping at Mar-a-Lago, Florida. The two leaders discussed the trade situation and publicly announced the "100-Day Plan" for negotiations. Under the 100-Day Plan, Chinese and U.S. delegates were to lay the groundwork for a long-term trade agreement.
Eight months after announcing the 100-Day Plan, Xi and Trump held a formal summit in Beijing. The meeting was reported as positive on both sides, with Trump taking the opportunity to reiterate his concerns over the ongoing trade relationship:
"Right now, unfortunately, it is a very one-sided and unfair relationship. But, I don't blame China. After all who can blame a country for taking advantage of another country for the benefit of its own citizens? But, I do blame past administrations for allowing this out of control deficit to take place and to grow. We have to fix this because it just doesn't work...it is just not sustainable."
Following the conclusion of the summit, President Xi responded to concerns over U.S./China trade and North Korean security in a measured fashion:
"As two distinctive countries, our two sides may have different views or differences on some issues. This is only natural. The key is to properly handle and manage them."
Unfortunately, the 100-Day Plan produced few tangible results and the optimism surrounding the November 2017 Trump/Xi Beijing summit was short-lived. Spring of 2018 brought a much different tone, including the institution of new export tariffs from both the U.S. and China. With neither side willing to concede, the standoff influenced many facets of the global economy, from monetary policy to equities market valuations.
Below is a detailed examination of the U.S./China tariff and negotiation timeline for 2018 and 2019:
- 8 March 2018: U.S. orders 25% tariffs on steel imports and 10% on aluminum from all exporters, not only China.
- 2 April 2018: China implements tariffs up to 25% on a basket of 128 U.S. exports.
- 15 June 2018: The U.S. announces a 6 July 2018 launch date for 25% duties on US$34 billion in Chinese imports, with another US$16 billion to become active after a short period. China retaliates by placing tariffs on US$34 billion of U.S. goods.
- 10 July 2018: Plans for 10% tariffs on US$200 billion of Chinese imports are announced.
- 1 August 2018: President Trump orders the U.S. Trade Representative to boost the proposed 10% tariffs to 25% on US$200 billion of Chinese goods.
- 7 August 2018: China responds by putting 25% duties on US$16 billion of U.S. goods.
- 24 September 2018: The U.S. activates 10% tariffs on US$200 billion of Chinese imports. Officials also announce that on 1 January 2019, the duties are to increase to 25%. China counters by slapping new tariffs on US$60 billion of U.S. goods.
- 1 December 2018: The U.S. and China agree to a 90-day moratorium on any new tariffs. In addition, the scheduled 1 January 2019 increase to 25% is delayed in return for large-scale Chinese purchases of U.S. products.
- 24 February 2019: President Trump decides to extend the 90-day grace period and hold levies at 10% for an undetermined amount of time.
- 8 May 2019: The U.S. announces that it intends to raise tariffs on the existing US$200 billion in Chinese imports effective 10 May 2019.
- 29 June 2019: At the G20 Summit in Osaka, Japan, China and the U.S. agree to restart trade talks. Concessions from each side are made at the summit, including no new U.S. tariffs and significant Chinese purchases of U.S. agricultural products.
- 1 August 2019: Tensions mount as the U.S. announces 10% tariffs on an additional US$300 billion worth of Chinese imports. These levies are in addition to the 25% previously placed on US$250 billion in Chinese goods.
- 5 August 2019: China retaliates to the new tariffs by halting U.S. agricultural purchases. Further, the People's Bank of China (PBoC) allows the yuan renminbi (CNY) to fall beneath a 7/1 exchange rate to the USD. In return, the U.S. Treasury Department labels China a "currency manipulator."
- 13 August 2019: The U.S. delays a majority of the planned 10% duty on US$300 billion of Chinese exports until 15 December 2019.
- 23 August 2019: China formally announces plans to add 10% levies on US$75 billion of U.S. goods.
- 20 September 2019: U.S. and Chinese officials meet for the first time in several months. The dialogue is reported by both sides as being "productive."
Crafting A Trade Deal
On 13 December 2019, the U.S. and China agreed to terms on "Phase One" of a comprehensive trade deal. The agreement aimed to ease economic tensions between the two nations and promote progress in crafting a long-term arrangement. Phase One outlined provisions that reduced U.S. tariffs on select Chinese goods. It also stated that China was to boost purchases of U.S. agricultural, energy and manufactured goods.
Below are the primary two-way concessions included in the agreement:
- The U.S. eliminated the planned 15 December 2019 tariff hike on US$160 billion of Chinese goods.
- China canceled retaliatory duties scheduled to go into effect on 15 December 2019.
- The U.S. cut its 1 September 2019 tariffs by 50%. Existing 25% levies on US$250 billion in Chinese goods remained in place.
- China pledged to increase purchases of U.S. goods by a minimum of US$200 billion over a two-year period. Also, China committed to buy American agricultural products by US$32 billion over two years.
- Provisions for stronger legal protections on patents, copyrights and intellectual property were put into place.
- China agreed to abstain from competitive currency devaluations.
Phase One was tentatively scheduled to be signed by U.S. and China officials in mid-January 2020. While only the first step in crafting a comprehensive deal, most in the financial industry viewed Phase One as being a move in the right direction. After more than 18 months of sabre-rattling and tariff escalation, the agreement was a welcomed sight to individuals and companies caught up in the economic firestorm.
The U.S./China trade war of 2018 and 2019 impacted commerce around the globe. A diverse array of businesses were affected as were various monetary policies, geopolitics and market behaviour. As of this writing, the situation remains fluid and a final resolution to U.S./China trade has yet to be found.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…