Navigating the Complexities of the US-China Phase One Trade Deal

The ongoing trade tensions between the US and China have had a negative impact on consumers and producers in both countries. The tariffs imposed by the US on Chinese imports have reduced trade between the two nations, but the bilateral trade deficit remains largely unchanged. While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardize the projected recovery in global growth in 2019.

According to a blog post by the International Monetary Fund (IMF), the raising of US tariffs to 25 percent on $200 billion of annual Chinese imports on May 10, together with the announced Chinese retaliation, marks the latest escalation in the US-China trade tensions. The impact of previously imposed tariffs by the US and subsequent retaliation by China is already evident in trade data. Both the countries directly involved and their trading partners have been affected by rising tariffs.

In 2018, the US imposed tariffs sequentially on three "lists" of goods from China, targeting first $34 billion of annual imports, then $16 billion more, and finally an additional $200 billion. As a result, US imports from China have declined quite sharply in all three groups of the goods on which tariffs were imposed. In cases where there was a delay between announcement and implementation of tariffs, as in the case of the $16 billion and $200 billion lists, or plans to phase in the tariff increase, as in the case of the $200 billion list, we observed an increase in import growth in advance of the effective dates. This suggests that importers stocked up ahead of the tariffs, accounting for the sharper decline in imports thereafter.

As China imposed retaliatory tariffs, US exports to China also declined. While the front-loading dynamic is not evident in this case, US export growth to China has been generally weaker since the trade tensions began.

Consumers in the US and China are unequivocally the losers from trade tensions. Research by Cavallo, Gopinath, Neiman, and Tang, using price data from the Bureau of Labor Statistics on imports from China, finds that tariff revenue collected has been borne almost entirely by US importers. There was almost no change in the (ex-tariff) border prices of imports from China, and a sharp jump in the post-tariff import prices matching the magnitude of the tariff. Some of these tariffs have been passed on to US consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins. A further increase in tariffs will likely be similarly passed through to consumers.

The effect on producers is more mixed, with some winners and many losers. Some US and Chinese producers of goods competing in domestic markets with imports affected by tariffs, as well as competing third-country exporters, are potential winners. However, US and Chinese producers of the goods affected by the tariffs as well as producers that use those goods as intermediate inputs are potential losers.

Trade diversion is one channel through which producers are affected. Aggregated bilateral US data does suggest that trade diversion has occurred, as the decline in imports from China appears to have been offset by an increase in imports from other countries. For example, US imports from Vietnam increased significantly among some goods on which the US imposed tariffs. After the $16 billion list was implemented in August, a sharp decline of nearly $850 million in imports from China was almost offset by about $850 million increase from Vietnam, leaving overall US imports broadly unchanged.

The other channel by which producers could be affected is through market segmentation in the price of traded goods. This was most clearly observed in the case of soybeans, where US exports to China fell dramatically in 2018 after China imposed tariffs. The United States was China's dominant soybean supplier, along with Brazil, in 2017. With the tariffs, the price of US soybeans fell while that of Brazilian soybeans increased, as US exports to China dropped to near zero and Brazilian exports to China trended higher. Though prices have since re-converged and soybean exports to China have resumed to some extent, US soybean farmers suffered, while those in Brazil benefited from trade diversion and market segmentation.

The impact on US producers with significant exposure to Chinese markets was also captured in stock market valuations. For instance, the equity price performance of US companies with high sales to China underperformed relative to US businesses exposed to other international markets, after tariffs linked to the $34 billion retaliation list by China were implemented. The gap narrowed at the beginning of 2019 with the trade truce. But it reopened again after the US tariff increase to 25 percent on the $200 billion list was announced on Twitter.

The ratcheting up of bilateral tariffs between the US and China has had a limited effect on their bilateral trade balance. In fact, in 2018, the trade deficit increased for the US as imports from China rose, which partly reflects the front-loading. As of March 2019, a small decline can be observed, but US exports to China are also falling. Indeed, macroeconomic factors—including relative aggregate demand and supply in partner countries and their underlying drivers—play a much bigger role than tariffs in determining bilateral trade balances.

At the global level, the additional impact of the recently announced and envisaged new US-China tariffs, expected to extend to all trade between those countries, will subtract about 0.3 percent of global GDP in the short term, with half stemming from business and market confidence effects. The IMF's forthcoming G-20 Surveillance Note in early June will provide further details. These effects, while relatively modest at this time, come on top of tariffs already implemented in 2018. Moreover, failure to resolve trade differences and further escalation in other areas, such as the auto industry, which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade.

In addition, higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately. This type of scenario is among the reasons why we referred to 2019 as a delicate year for the global economy.

Vietnam is experiencing unprecedented growth, making it an attractive destination for foreign investors looking to diversify their operations and manage risks. The country's proximity to China, competitive labor costs, and favorable business environment make it an ideal location for companies looking to adopt a "China plus one" strategy.

This strategy involves supplementing Chinese operations with low-cost inputs sourced from production facilities in alternate markets, such as Vietnam. By doing so, investors can reduce their reliance on China and mitigate risks associated with trade shocks, rising costs, and other unpredictable scenarios.

However, choosing the right location in Vietnam can be challenging. The country has a high degree of regional diversity, with different provinces offering unique competitive advantages for various industries and types of businesses. For example, the Ho Chi Minh City area is a vibrant commercial center with a deep and diversified supply chain, while the central region offers cost advantages unmatched by the north or south.

To make an informed decision, investors should consider several factors, including human resources, real estate, infrastructure, costs, operating environment, proximity to suppliers and customer markets, legal and regulatory environment, and operating environment. These factors will enable investors to better understand their options in new markets and make informed decisions on where to invest.

Labor availability is another crucial factor to consider. Vietnam has a population of over 97 million people, with urban centers providing a home for just 35 percent of the population. Companies entering Vietnam for the first time often fail to account for regional variation in the labor market and invest in locations ill-suited to their industry.

Investors should also be aware of the regulatory environment in Vietnam. The country's regulatory regimes and commercial law can be complex, with overlapping jurisdictions of some government ministries resulting in a lack of consistency in government policies. Additionally, poor corporate disclosure standards and a lack of financial transparency can add to due diligence and KYC challenges.

A competitive analysis comparing several countries or geographical areas is also essential. This involves cross-referencing and benchmarking several factors, such as political climate, economic environment, regulatory landscape, cost analysis, labor, and taxes. By doing so, investors can make an informed decision when relocating their production to countries like Vietnam.

In conclusion, Vietnam offers numerous advantages for foreign investors looking to diversify their operations and manage risks. However, choosing the right location, considering labor availability, understanding the regulatory environment, and conducting a competitive analysis are crucial steps in making an informed decision. By doing so, investors can ensure a successful relocation and take advantage of Vietnam's growing economy.

It's also important to note that each relocation or investment project requires a tailored approach. While these are general guidelines, it's recommended that investors use a professional service to ensure a smooth transition.

Vietnam's economy, despite the pandemic, has shown resilience and is expected to bounce back strongly in 2021. The country's GDP growth is expected to reach 6.5 percent in 2021, driven by a recovery in domestic demand and exports. Vietnam's trade agreements, such as the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), are also expected to boost trade and investment.

The country's business environment continues to improve, with the government implementing policies to support businesses and attract foreign investment. Vietnam's infrastructure is also being upgraded, with major projects such as the North-South Expressway and the Long Thanh International Airport.

In addition, Vietnam's labor market is becoming increasingly attractive, with a growing pool of skilled workers and competitive labor costs. The country's education system is also being improved, with a focus on vocational training and developing skills in areas such as technology and engineering.

Overall, Vietnam offers numerous advantages for foreign investors looking to diversify their operations and manage risks. With its growing economy, favorable business environment, and competitive labor costs, Vietnam is an attractive destination for companies looking to adopt a "China plus one" strategy.

In conclusion, Vietnam is a promising destination for foreign investors looking to diversify their operations and manage risks. With its growing economy, favorable business environment, and competitive labor costs, Vietnam offers numerous advantages for companies looking to adopt a "China plus one" strategy. However, choosing the right location, considering labor availability, understanding the regulatory environment, and conducting a competitive analysis are crucial steps in making an informed decision. By doing so, investors can ensure a successful relocation and take advantage of Vietnam's growing economy.

Navigating the Complexities of the US-China Phase One Trade Deal

The US-China Phase One trade deal, signed on January 15, 2020, marked a significant development in the ongoing trade tensions between the two countries. The deal includes provisions on intellectual property, technology transfer, and trade in goods and services, among other areas. However, the deal also leaves many questions unanswered, and its implementation is expected to be complex and challenging.

One of the key challenges in implementing the deal is the lack of clarity on certain provisions. For example, the deal includes a provision on intellectual property that requires China to strengthen its intellectual property laws and enforcement. However, the provision does not provide clear guidance on how China should implement these changes, leaving room for interpretation and potential disputes.

Another challenge is the lack of a clear mechanism for resolving disputes. The deal includes a provision for resolving disputes through bilateral consultations, but it does not provide a clear process for resolving disputes that cannot be resolved through consultations. This lack of clarity could lead to further tensions and disputes between the two countries.

Despite these challenges, the US-China Phase One trade deal is an important step towards resolving the ongoing trade tensions between the two countries. The deal provides a framework for cooperation on key issues, such as intellectual property and technology transfer, and it includes provisions for increasing trade in goods and services.

However, the deal is not a panacea for the ongoing trade tensions between the two countries. The deal does not address many of the underlying issues that have contributed to the tensions, such as China's state-led economic model and the US's concerns about China's growing economic and military power.

In conclusion, the US-China Phase One trade deal is a complex and challenging agreement that requires careful implementation and monitoring. While the deal provides a framework for cooperation on key issues, it also leaves many questions unanswered and does not address many of the underlying issues that have contributed to the ongoing trade tensions between the two countries.

Conclusion

In conclusion, navigating the complexities of the US-China Phase One trade deal requires a deep understanding of the agreement and its provisions. The deal is a complex and challenging agreement that requires careful implementation and monitoring. While the deal provides a framework for cooperation on key issues, it also leaves many questions unanswered and does not address many of the underlying issues that have contributed to the ongoing trade tensions between the two countries.

Investors looking to diversify their operations and manage risks should consider Vietnam as a promising destination. With its growing economy, favorable business environment, and competitive labor costs, Vietnam offers numerous advantages for companies looking to adopt a "China plus one" strategy. However, choosing the right location, considering labor availability, understanding the regulatory environment, and conducting a competitive analysis are crucial steps in making an informed decision.

By doing so, investors can ensure a successful relocation and take advantage of Vietnam's growing economy. Qwillery will continue to provide updates and insights on the US-China trade tensions and the implications for businesses and investors. Stay tuned for more information and analysis on this complex and evolving topic.