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Stepan Lavrouk
Stepan Lavrouk
Articles (382) 

What’s Up With the New Trade Deal?

The partisan mudslinging can make it difficult to figure out what is actually being done

December 16, 2019

The ongoing U.S.-China trade war feels like a never-ending story. For many months now, we have been told that "a deal is right around the corner," only to be left hanging. Last week, it was announced that the two parties have reached what is being referred to as a "phase one" deal, and the mudslinging quickly ensued, with supporters of President Trump cheering the agreement as a great step forward, and opponents - like economist Paul Krugman - criticizing it harshly.

With all this noise telling you how to feel about the deal, it’s difficult to pinpoint exactly what it actually entails. Let’s try to figure it out in the most non-partisan way possible.

The facts

The Office of the U.S. Trade Representative released an official fact sheet on the deal, listing the key areas of agreement. These include: intellectual property protection, technology transfer (the practice of the Chinese government forcing foreign companies to hand over proprietary knowledge to Chinese companies in exchange for doing business), agricultural purchases, financial services, currency manipulation, trade commitments and dispute resolution.

Regarding intellectual property and technology transfer, the language of the agreement seems to be pretty broad. China is promising to “address long standing concerns” on intellectual property and is pledging to stop the practice of forced technology transfer. If implemented, this would constitute a huge change to the way China does business; consequently, it seems highly probable that Beijing will not follow through on this promise.

In exchange, the U.S. will lower tariffs on $110 billion worth of Chinese goods, and will delay the implementation of further restrictions. The U.S. will still have a 25% tariff on $240 billion worth of Chinese imports, which gives Washington significant leverage in subsequent negotiations. So, taken at face value, the deal looks quite good for the United States.

The problems

The assumption that China will actually follow through on its commitments is a pretty big one. There are several reasons why I think they might not. First, as mentioned, technology transfer has long been a useful tool for Chinese businesses. Second, extremely lax intellectual property legislation is a cornerstone of the Chinese economy - it’s a feature, not a bug.

This encourages companies to be as dynamic and innovative as possible - if a competitor can just take your proprietary technology, you have a strong reason to continue iterating and evolving. It’s extremely difficult to imagine China redesigning the economy in a context where growth is already slowing.

President Trump and his administration cannot risk looking weak on a key part of their foreign and economic policy. This means they have a very strong incentive to crack down on China in the event they perceive that they are cheating. I think the combination of these two factors means the deal will not be upheld for very long.

The upshot of all of this is that investors should not get too excited by the prospect of the deal. With markets at all-time highs, it seems like a bad time to be getting sucked in.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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