A world trade war is brewing. The US-China deal won't stop it

A view of the container port in Qingdao in eastern China's Shandong province on Tuesday, Jan. 14, 2020. The United States has signed a partial trade agreement with China. But that doesn't mean simmering conflicts and uncertainty over trade won't drag down the global economy this year.

The United States has signed a partial trade agreement with China. But that doesn't mean simmering conflicts and uncertainty over trade won't drag down the global economy this year.

Tensions between the world's two biggest economies are likely to persist in 2020 as Beijing and Washington enter a second round of trade talks that are expected to be more difficult than the "phase one" process that culminated in a deal Wednesday in Washington.

The European Union is also locked in its own trade dispute with the United States that has strained ties between the preeminent western powers. And the United Kingdom's looming break with Europe brings with it a slew of challenges as the country attempts to forge a new relationship with its largest export market.

Reaching past the 'low-hanging fruit'

President Donald Trump has heralded the "phase one" US-China trade deal as a significant breakthrough. US officials said the agreement will reduce some tariffs and allow Beijing to avoid additional taxes on almost $160 billion of the country's goods. The Trump administration also said it received commitments from China to purchase billions worth of agricultural goods and crack down on intellectual property theft.

"Are we in an ideal spot? No," Robert Lighthizer, the president's top trade negotiator, told reporters before the signing. "Is this a massively good first step? Yes."

But more specific details about the text of the agreement have been elusive. Economists, market analysts and trade experts also remain wary about whether the two countries can make serious headway on more substantial issues, such as Washington's demand that the Chinese government significantly reduce its role in the country's economy.

"The deal as outlined harvests all the low-hanging fruit," analysts at Capital Economics wrote in a research note last month. The initial deal "does not mark the end of tensions between the US and China," they added.

The two sides are keeping substantial tariffs in place. About two-thirds of all US imports from China — roughly $370 billion worth — will still be covered by tariffs after the deal is signed, according to a December analysis from the Peterson Institute for International Economics. More than half of US exports to China would also still be subject to retaliatory tariffs, the institute said.

"Steep tariffs are the new normal," wrote Chad Brown, a senior fellow at the institute and former economist at the World Bank.

Others have cited "more troublesome" issues on the horizon. Speaking at an event in Hong Kong this week, former Federal Reserve chair Janet Yellen warned that competition between the United States and China could slow the development of artificial intelligence, 5G mobile networks and other technology related to national security.

China and the United States are already locked in a fight over Chinese tech company Huawei, a leading global provider of telecoms equipment used to build 5G networks.

The rift between the United States and China has other implications for the global economy.

"The world is edging towards distinct economic spheres centered on the US and China," Mark Williams, chief Asia economist at Capital Economics, wrote last October. While he noted that geopolitical rivalries can be productive — think of the space race between the United States and the Soviet Union — he said it is more likely that "limits to flows of people, technology and ideas" hold back global productivity.

Tensions with Europe

China isn't the only world power tangling with the United States over trade.

The Trump administration is weighing whether to impose tariffs on $2.4 billion in French products — including cheeses, handbags and champagne — to punish the country for its new tax on digital services.

The United States has argued that France's tax, which affects large American tech firms such as Facebook and Google, represents a barrier to trade. The European Union, which manages trade policy on behalf of its member states, has threatened to respond if provoked.

New tariffs would escalate an already tense relationship between Washington and Brussels. The Trump administration imposed a 25% tariff on most European wine in October, in retaliation for government subsidies received by planemaker Airbus. Since then, the White House has threatened to raise the tax because of a lack of progress in resolving the issue.

Washington had also already imposed taxes on steel and aluminum made in the European Union and threatened higher tariffs on German cars despite substantial investments made in the United States by BMW, Volkswagen and Daimler.

An agreement that addresses these issues with Europe will be one of Trump's priorities for 2020, according to William Reinsch, an expert at the Center for Strategic and International Studies who served for 15 years as president of the National Foreign Trade Council.

It's an immensely important relationship for both sides to maintain. Trade between the United States and the European Union is worth more than $1.1 trillion a year — the largest bilateral relationship anywhere in the world.

Yet a deal is likely to prove elusive. Reinsch pointed out in a recent blog post that talks may not even get off the ground because of a disagreement over whether agriculture — a highly subsidized and protected industry in Europe — should be included in negotiations.

Even if discussions begin, Reinsch argued they could be derailed by a number of threats including higher auto tariffs, which will resurface "the first time the president loses patience with the slow pace of talks."

He added that if progress is made, "the president's desire for a 'victory' he can brag about before the election will take precedence over substance ... and hollow victories will be declared."

Brokering a Brexit deal?

With Brexit set for January 31, the United Kingdom is also seeking a trade deal with the European Union.

This one must be completed before the end of the year or trade barriers will be erected between the country and its biggest export market.

Most trade deals take years to negotiate, but Prime Minister Boris Johnson has insisted that he will not extend talks beyond the end of the year. That could hurt the United Kingdom's chances of striking a comprehensive agreement.

"If the government is to stick to the timetable at all costs then only a very limited deal ... is likely to be possible," said analysts at French bank Société Générale. "This will mean sacrificing the possibility of a good deal for services on the altar of political expediency."

Johnson has to strike a delicate balance. While the United Kingdom does a lot of business with the European Union — the market accounted for 44% of total UK exports of goods and services in 2017 — staying close to Brussels would limit its ability to reach a new trade deal with the United States. Johnson's supporters have touted that as a major potential benefit of Brexit.

Even so, new trade barriers are something the UK economy cannot afford. Experts have warned that such restrictions would limit economic growth and put the country's auto industry at risk of collapse.

Data published Monday showed a steep decline in Britain's GDP in November, suggesting the country's economy stagnated or contracted in the fourth quarter. The Bank of England may now resort to an interest rate cut in order to support growth.

Uncertainty over the United Kingdom's future trading relationships is likely to restrain GDP growth and the strength of the pound this year, according to Paul Dales, chief UK economist at Capital Economics.

— Ivana Kottasová, Katie Lobosco and Donna Borak contributed to this report.

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