Morning Commentary: U.S.–China Relations Under the Biden Administration

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U.S.–China Relations Under the Biden Administration  Share this story: Andrew Kositkun Senior FX Advisor

It’s been roughly one year since the U.S. and China signed their Phase 1 trade deal. With Joe Biden sworn in as the 46th president of the U.S., markets are watching to see where U.S.–China relations are heading. Will the U.S. and China rebuild ties, or will tensions escalate? And does the Phase 1 deal still matter? Here we take a look at some of the key topics.  Is the Phase 1 deal at risk?  China only achieved 70% of its committed Phase 1 purchases for the year. However, China’s overall imports declined by 1.1% year over year due to demand weakness, while imports from the U.S. grew 9.8% year over year. In reality, missing the Phase 1 import target is not a surprise, as the specific import target was always very ambitious even before COVID-19 shock hit. From a game theory point of view, it might not have been in China’s interest to hit the targets anyway, as missing target levels could give China a bargaining chip on other negotiations.  Among the key categories in the trade deal, China made the most progress in agricultural products, while purchases of manufactured goods lagged, with energy purchases nowhere near the target, partly due to price deflation. Looking ahead, the 2021 targets are even less likely to be hit, as that would require China to increase U.S. imports by 69%.  What happens next?  The Biden administration has indicated that it won’t abandon the Phase 1 deal or remove additional tariffs immediately, so what happens next?  A review of the Phase 1 deal looms large. China not only missed on numerical targets but is also likely to disagree with the U.S. on how much progress has been made on qualitative aspects of the deal. There are two possible paths from here. The first path would be a benign extension of the deadline to hit numerical import targets. After all, the COVID-19 pandemic fits the definition of a natural disaster or other unforeseen event within the Phase 1 dispute resolution clause. Alternatively, a new deal could be negotiated to replace the original one. Of course escalation is possible, but given the new administration’s focus on COVID-19 and domestic policies over international issues in the near term, this is an unlikely outcome.  What could change under a Biden administration?  What we do know from that data is that neither tariffs nor the Phase 1 trade deal have succeeded in reducing the overall U.S. trade imbalance. The Trump administration focused almost exclusively on bilateral trade balances, but economists in the Biden administration are expected to take a more nuanced view of the costs and benefits of trade. As such, the following are potential changes in how the U.S. could deal with China: Adopting a more predictable and less confrontational approach.  Coordinating with U.S. allies, such as Europe and Japan, to influence China together.  Attempting to reform, rather than sideline, international organizations, such as the World Trade Organization. Focusing on unfair trade practices, as they pertain to the environmental and labor standards, intellectual property rights, forced technology transfer and human rights rather than bilateral trade balances.  Of course, there are some things that won’t change. The Biden administration is likely to retain a tough-on-China stance, as there is bipartisan support for this. The U.S.–China technology rivalry also means that tensions on the tech front are unlikely to recede anytime soon.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The Fed delivered a dovish hold in line with market expectations. The central bank kept rates, asset purchases and forward guidance unchanged while noting that the pace of economic recovery and employment has moderated. Fed Chair Jerome Powell also noted that it was premature to talk about normalizing policy and that it was very unlikely that the U.S. would see “troubling” inflation, as the impending rise will be transient. In essence, the U.S. economy is a long way from full recovery, and the Fed is not close to thinking about changing its policy settings anytime soon. As such, expect monetary policy to remain accommodative until the Fed achieves its dual mandates.  U.S. fourth-quarter GDP growth came in softer than expected at 4.0% versus consensus for a 4.2% print. On the labor market front, initial jobless claims came in at 847,000, beating consensus for an 875,000 print. Last week’s number was also revised down to 900,000 from 914,000, so this week’s beat was even bigger than headline numbers suggest.  On the vaccine front, the vaccination gap between the U.S. and Europe continues to widen, as issues with suppliers are getting worse. Some EU members have called for outright restrictions on vaccine shipments, and the EU is set to decide on the export permit process tomorrow. Germany has also recommended the AstraZeneca shot only be given to 18- to 64-year-olds.  The Biden administration is preparing a dual-track stimulus plan, with one assuming bipartisan support and the other relying solely on Democrats.  News reports suggest that European Central Bank (ECB) officials want to push back on market skepticism regarding rate cuts. This aligns with comments out yesterday indicating that the ECB was ready to adjust all of its instruments as needed.  Japanese Prime Minister Yoshihide Suga and President Biden held their first phone call yesterday, with Biden expressing his unwavering commitment to the defense of Japan. Elsewhere, Secretary of State Antony Blinken rejected Chinese territorial claims in a call with the Philippines while emphasizing existing U.S. alliances with Australian and Thai officials. These developments illustrate the multilateral approach to contain China rather than the unilateral one used by the previous administration.

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