The Morning Commentary: A New Lunar Year But Same US–China Dynamic
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
A New Lunar Year But Same US–China Dynamic
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Andrew Kositkun Senior FX Advisor
Presidents Biden and Xi finally held their first phone call since Biden became president. Given all that is going on in the world, U.S.–China relations have been moved to the back burner since the signing of the Phase One trade deal early last year. As part of the deal, China agreed to expand its purchases of U.S. products by $200 billion from 2017 levels through purchase made in 2020 and 2021.
As it turns out, China didn’t come close to meeting its purchase targets but in reality, the Phase One trade deal was doomed from the start. Not only were the import demands on China too big, but there were also no mechanisms to achieve them. This aside, China did increase its purchases of U.S. goods, but the U.S. trade deficit with China remains wide. Part of this is due to U.S. demand for pandemic-related products, such as work-from-home equipment and medical supplies. Demand for other consumer goods from U.S. households was also elevated due to stimulus checks.
Looking ahead, there remains upside to U.S. consumer spending. Data shows an uptick in consumer spending after the latest round of stimulus passed in December. With Biden’s $1.9 trillion fiscal proposal making its way through Congress, consumer spending should receive another boost, especially as the economy continues to reopen and excess savings go toward the previously closed services sector.
So what does this mean for the U.S.–China trade relationship? Historically, a pickup in U.S. retail sales comes with a pickup in imports from China, so China’s trade balance with the U.S. might not narrow this year even as China continues to ramp up purchases from the U.S. under the Phase One deal. However, the expectation is that the Biden administration will not focus solely on the bilateral trade balance. Therefore, a potential widening of the trade deficit will not necessarily lead to additional measures against China, but the persistently large deficit will be an ongoing irritant for the U.S.–China relationship.
So while a quick escalation of tensions is not expected, expect the U.S. to maintain its tough-on-China stance by focusing on geopolitical concerns, human rights, intellectual property protection and cybersecurity. Certainly, it is possible that there will be an attempt to reset the relationship, but the differences between the two sides are quite real, and a decoupling between the U.S. and China remains a major risk to the global economy.
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