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Phase two of US-China trade deal will be more challenging and less transparent than phase one – The Hill

An article in The Hill which is circulating explains that with the phase-one trade deal between the US and China about to be signed, a key threat hanging over the global economy has diminished., although it also highlights the challenges that await negotiators.

Lead paragraphs

After 18 months of wrangling about Chinese purchases of U.S. goods and opening of its markets, investors are hopeful that the current pause in the trade war will be maintained.

But many trade experts are wary. One reason is that disputes inevitably will arise over specific features of the agreement, the most notable being the volume of Chinese purchases of U.S. farm goods. If so, enforcement mechanisms call for the two sides to settle them during subsequent rounds of talks. But if that doesn’t work, U.S. Trade Representative Robert Lighthizer has indicated the U.S. could re-impose duties on China.  

A second reason is that the easiest part of the trade dispute is now past. The hard part is about to begin that will cover long-standing issues relating to intellectual property violations and forced technology transfer by China, as well as subsidization of Chinese industries.

Key notes and market implications

  • Looking ahead, the most difficult issue to resolve relates to Chinese government subsidies of state-controlled businesses.
  • It remains to be seen whether China will make concessions about subsidization of state-controlled businesses. But the most likely outcome is that they will be very limited.
  • As Robert Lighthizer has acknowledged, “Whether the whole agreement works is going to be determined by who is making decisions in China, not the United States.” He indicated that the U.S. is hoping reformers rather than hard-liners will call the shots.
  • Investors, therefore, must be prepared for the possibility that an impasse will be reached; if so, they will have to determine how markets will react. 
  • A more measured response is likely — one that will not cause financial markets to erupt. This is possible because it is difficult to monitor the effect of non-tariff measures: President Trump can merely assert whether progress is being achieved without markets knowing what is happening behind the scenes.
  • I believe the struggle between the US and China over the past 18 months makes it more likely that forthcoming changes in trade will entail inevitable compromises, as well.

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