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.

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

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?