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  • US-China Trade Deal: Challenges, Risks, and Future Prospects

US-China Trade Deal: Challenges, Risks, and Future Prospects

Syllabus:

GS-2:

Effect of Policies & Politics of Countries on India’s Interests , International Treaties & Agreements , Government Policies & Interventions , India and its Neighbourhood , Important International Institutions

Focus:

The recent announcement of a temporary suspension of tariffs between the US and China has sparked renewed hopes for a trade agreement. However, past experiences and ongoing complexities indicate that a stable, enforceable deal remains uncertain, with potential lasting disruptions to global supply chains and economic relations.

US-China Trade Deal: Challenges, Risks, and Future Prospects

Background of US-China Trade Relations:

Tariffs as Negotiation Tools

  • The US, under President Donald Trump, employed tariffs as leverage to pressure China into trade concessions.

  • Trump viewed tariffs as a bargaining chip, expecting that escalating trade tensions would force China to concede and produce a political win.

  • Unlike simple business deals, trade negotiations, especially between superpowers, are slower, complex, and have broader geopolitical consequences.

China’s Position and National Pride

  • China has a large economy with significant leverage in negotiations.

  • It resists conceding to demands perceived as humiliating or detrimental to national pride.

  • Yielding to aggressive US demands risks domestic backlash in China, making compromise difficult.

  • The Chinese proverb, “Once riding a tiger, it is difficult to get off,” aptly describes China’s position in the trade war.

Complexity of Trade Agreements:

Drafting Difficulties

  • The US-China trade deal is complicated to draft due to differences in legal and regulatory frameworks.

  • The 2019 talks failed as the US wanted a detailed 150-page contract with strict legal reforms, while China preferred a flexible, principle-based approach.

Enforcement Challenges

  • The “Phase One” deal signed in January 2020 lacked a neutral enforcement mechanism.

  • It relied on mutual compliance, which proved fragile when China missed purchase targets.

  • The absence of strong enforcement reduced trust, especially amid political changes in the US.

  • As a result, any new deal is likely to be fragile, limited in scope, and prone to collapse.

Impact on Global Supply Chains:

Disruptions and the Bullwhip Effect

  • The trade war caused severe disruptions to global supply chains, already fragile and complex.

  • Retailers and manufacturers faced uncertainty, leading to canceled orders, stockpiling, and rerouted production.

  • The bullwhip effect describes how small supply chain disruptions cause disproportionately large and lasting impacts.

Case Study: Toy Industry

  • For example, US retailers planning for Christmas need to place orders by March for production starting in April.

  • Tariff unpredictability causes delays in orders, disrupting manufacturing schedules and shipment timelines.

  • Even lifting tariffs now may not fully restore normal supply because production lines must adjust and reconfigure.

Economic Consequences and Market Instability:

Price Volatility

  • Fluctuating tariffs drive retail price increases due to supply shortfalls.

  • Higher prices can send confusing signals to suppliers, aggravating problems of oversupply and underproduction.

  • This cyclical instability causes significant market volatility, harming businesses and consumers alike.

Comparisons to Pandemic Disruptions

  • Similar to the pandemic’s sudden shutdowns causing shortages and gluts, the trade war’s policy-driven turmoil threatens long-term instability.

  • Unlike natural crises, this chaos stems from deliberate political decisions, complicating resolution.

Looking Ahead: Outlook and Risks

The Limits of Tariff Diplomacy

  • Trump’s unpredictable use of tariffs might have worked in private business, but in global commerce, it breeds chaos.

  • Supply chains require certainty and stable policies; bluffing and policy reversals undermine this foundation.

Advice for Stakeholders

  • Investors, businesses, and policymakers should prepare for continued disruptions in supply chains.

  • Any US-China trade deal is expected to be fragile and short-lived, necessitating caution in economic planning.

  • The long-term consequences of this trade war will reverberate through factories, ports, and retail markets worldwide.

Conclusion:

While the temporary suspension of US-China tariffs brings momentary relief, the deep-rooted challenges of drafting, enforcing, and trusting a comprehensive trade agreement make a durable deal unlikely. The ongoing trade tensions will continue to destabilize global supply chains and markets, with uncertainty likely to persist, demanding cautious approaches from investors and policymakers.

Source: Mint

Mains Practice Question:

“Discuss the challenges and economic impacts of the US-China trade war on global supply chains. How do differences in negotiation styles and enforcement mechanisms affect the prospects of a durable trade agreement between the two powers?”