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Looking good: Building a China-US trading relationship into a long-term equilibrium

The saying "what's good for business is good for the USA" might well be re-stated as "what's good for the USA is good for China" at least in terms of trade. And that's how major investment banks see it as we head into the New Year.

"Corporate executives are surprisingly bullish about the US economic outlook for 2020, judging from an extensive analysis of management commentary in Q3 2019 earnings conference calls conducted by Goldman Sachs," says Investopedia. Among the companies with optimistic outlooks are Marriott International, Procter & Gamble, Republic Services, Harley-Davidson and Allegion PLC.

Morgan Stanley also forecasts that global growth will recover from the first quarter of 2020 as trade tensions and monetary policies ease, reversing the downward trend of the past seven quarters.

“Easing trade tensions will reduce business uncertainty and make policy stimulus more effective,” the bank’s analysts said in their global outlook for 2020, projecting world economic growth of 3.2 per cent next year, compared to three per cent in 2019.

But much depends on the outcome of US-China trade relations and whether American tariffs go into effect. If activated, global growth could slow to 2.8 per cent and a recovery will be delayed until the third quarter of 2020, according to Morgan Stanley.

Despite the popular notion that the outlook for trade between the United States and China is gloomy, there is room for optimism that a positive outcome benefitting multinational companies can be achieved.

These investment banks say companies evaluating business strategies in China should focus on staying the course and avoid making major shifts based on the short-term fluctuations. In short, there is light at the end of the tunnel.

US President Donald Trump’s unilateral approach has undoubtedly created some self-inflicted damage to American companies and the US economy, and companies have legitimate concerns over the harsh rhetoric and escalations since the first tariffs were implemented in 2018. Trade tensions have cast a cloud of uncertainty over the business environment, which has made decisions on future investments difficult.

Speculation over possible efforts to “de-couple” the world’s two largest economies has increasingly been a cause of concern for companies that rely on supply chains in China. But many say companies should position themselves to benefit from a trade deal which is likely to bring an upturn in fortunes if only it dispels the present cloud of uncertainty.

Major de-coupling seems unlikely, and both Washington and Beijing have indicated that they recognise what is at stake if they fail to co-operate. Furthermore, endless rounds of talks throughout 2019 have established a basis for continued dialogue.

Hotel operator Marriott calls the US economy "robust" overall, and notes that its industry has low unemployment and high occupancy. Consumer products company Procter & Gamble sees "no signs of weakness." Waste hauling company Republic says "the underlying economy is pretty strong...our view now and our view for 2020 is the economy is in pretty good shape." Motorcycle manufacturer Harley-Davidson does not see any more uncertainty than six months ago, and noted that its own industry enjoyed a Q3 "pick up," calling this "an encouraging sign".

Security products and services company Allegion says "we are solid, positive, upbeat on the economy." They find that the key indicators for their business are encouraging, including consumer confidence, low unemployment, and high tax revenues for state and local governments, low interest rates, and a tight housing market. In conclusion, they "don't know how you could not be positive about the view going forward".

In general, the indications are clear that the good times can roll on as long as a soundly based modus vivendi can be devised that will bring about an reliable equilibrium to the way the world's largest economies regard each other.

The way New York consultancy Teneo analyst Paul Haenle sees it, not all fault can be laid at the door of President Trump. Even a more traditional president such as Hillary Clinton or Jeb Bush would have taken a tougher approach towards China, especially on trade and economic issues.

Trump’s approach differed from the standard, rejecting collaboration with allies, building coalitions and leveraging multilateral frameworks, said Teneo's Mr Haenle. Trump instead relied on pressure through tariffs and rhetoric. However, while his approach may be distinct stylistically, it is important to note that there was already a growing consensus in Washington prior to Trump’s election that the US needed to take action to address longstanding grievances on trade and economic issues.

For much of his first year in office, Trump was initially transfixed by the US trade deficit with China, which justified the first rounds of tariffs in early 2018. While deep state Washington disagreed with Trump, there was growing consensus outside the Beltway that China’s trade practices needed to be sorted.

A meeting between Trump and President Xi Jinping at Mar-a-Lago in April of 2017 signalled that the two leaders recognised the need for negotiators from both sides to sit down and engage in talks. Despite Trump’s harsh campaign rhetoric towards China, he left the meeting touting the “great chemistry” he had with President Xi.

Shortly after the start of his second full year in office, Trump began implementing tariffs on a range of imported goods, including several major imports from China. China responded with retaliatory tariffs in April 2018, prompting Trump to announce plans for 25 per cent tariffs on $50 billion of Chinese imports only one day later. China responded in kind by revealing its own plans for tariffs on $50 billion in exports.

Said Mr Haenle: "From that point on, Trump has recognised that in order to effectively sell the deal at home, he would have to achieve some degree of progress in resolving issues such as intellectual property theft, forced technology transfer, and nontariff barriers, in addition to bringing China’s industrial subsidies and support for state-owned enterprises in line with World Trade Organization guidelines."

Despite the arrest of Huawei CFO Meng Wanzhou in Vancouver (at the request of the US government) on the same day Trump and Xi met in Argentina, positive signals in early 2019 offered a glimmer of hope after the two sides held seven consecutive rounds of trade talks over the span of four months to start the year.

What is clear from the to-ing and fro-ing is that both sides - narrowing it down to Xi and Trump - have much to gain and much to lose if things go bad. Like gladiators at the Coliseum in Ancient Rome, each faces the other with weapons and shields the other does not possess.

President Xi, for example, need not fear his citizens or media as he is a dictator immune from domestic public criticism, but he does have to fear an economic downturn, which puts his municipal and provincial party cadres at risk, which in turn can put the Beijing curia at risk. Xi also must worry about an uprising in Hong Kong, increasingly scandalous stories about Muslim concentration camps, which may well impact on trade flows which are his big hope to get him out of an expected downturn.

Trump for his part is heading into an election in November. There's been the stain of impeachment hearing and lingering scent of the FBI Russian collusion investigation. A triumph in China would go a long way to mitigate the effect of the negative material a permanently hostile media disseminates ready to highlight his every fault and ignore his every accomplishment.

So both men need victories and need them within the next few months. The question is: How do they both win in a way that does not make it appear the other is a loser in the eyes of their very different constituencies?

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Do you see what would amount to a long-term trade equilibrium emerging in the years ahead between China and the United States? Can it approach anything like reciprocity?

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