As India obsesses over the likely outcome of the Karnataka elections, there is a more subtle shift that is happening globally. In the midst of all the saber rattling over trade-related issues, China has finally decided to raise the white flag and talk peace. Actually, China has agreed to cutbacks to the tune of $200 billion in its trade deficit with the US to ensure that Trump’s broader concerns on the quantum of the deficit are addressed. Why did China agree and what could be the broader implications of this move.
Was it not symbiotic?
The move by China to raise the white flag becomes all the more mysterious considering that the US and China really do not compete on the same product lines. While the US looks at China as the world’s largest consumer market for cars, food products and airplanes; for China it is the likes of Apple and Boeing that provide large number of jobs in China. To that extent the relationship is symbiotic. The US realizes that if China were to impose counter sanctions then it would have its impact on a variety of US industries from aircraft makers to car manufacturers and apparel companies. But China has a slightly different problem. They are on a sticky wicket on two fronts. Firstly, they are on a sticky wicket on the subsidies front and secondly they are on a sticky wicket on the technology transfer front. Let us understand this in greater detail.
Subsidies and tech transfers…
Broadly, there are two things that the US has accused China of. Firstly, the Chinese government has been giving subsidies to domestic manufacturers and that helps them produce metals, capital goods and tires at a much lower cost. This has already attracted the ire of countries like India and certain EU nations. China would not want a relapse of that problem. Secondly, China has been using low-cost outsourcing as a pretext for catalyzing tech transfer to build its own domestic pool. With both factors working against them, China sees wisdom in dousing the trade deficit flames for now!
Currencies and dumping…
Chinese companies have been generally accused of getting subsidies from their government. This, combined with a cheap Yuan, enables them to dump products at much lower prices. China realizes that any trade war would degenerate into a currency war which could lead to a sharp spike in its dollar debt liability. Also, China fancies itself as a formidable strategic influence in the entire Pacific region and it has already started building its influence via land and sea. For China, a white flag with the US is just a pause. It is more of a short term concession for long term strategic benefits. After all, if Trump is satiated then other noises over China will automatically get muted!
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