USA – CHINA TRADE AGREEMENT – How will this look like – Changed economic compulsions would dictate the water-down trade agreement:

Trump Trade war has some wins and some misses till now. With China, it could be a different story. We need to understand that the political setup in China allows them to negotiate at a low speed which can be difficult to digest by political setup which is asking questions and demanding results immediately.    

USA is accusing China that undue capital investments subsidies are providing undue advantage to the Chinese companies to be more competitive as compared to the USA companies. The other major issue is a lack of respect for Intellectual protection and forced transfer of technology by China in exchange for its market.

Tariffs, In reality, has put both the US and China in a tough situation right now with 10 to 25% tariffs on $250 billion in imports from China.  The trade problem has risen to a crisis situation for some of the countries with Germany & Japan almost in recession and East Asia and Pacific have downgraded their growth projections.  

Let us see issue by issue what the economic compulsions of both sides are, and how the present realities would dictate the agreement.

Regarding the capital subsidy issue, China would be very happy to address this at once in exchange of zero tariffs on goods from both sides.  Reasons for the same are as under:

1. China center and provincial government debt of  200+% of GDP, in any case, would not allow them to indulge in this luxury anymore.  This is also amplified by the poor show of shadow banking credits extended to the industry in China. With cooling GDP,  reduced construction activities and peaking consumption, the government and the Bank of China is already advocating this to the industry.  
2. Chinese companies needed this support 10-15 years ago. Now they have scale and size and do not need this anymore.
3. The years of subsidy have made them competitive and, in any case, this trade agreement will at best be negotiated on no more direct capital subsidies to the industry. Whatever has happened cannot be undone now.
4. Interest rates in China have already dropped from 6.5% to 4.5% in the last 10 years and further cooling is expected as debt with OECD countries will not allow them to raise interest rates in their countries and inflation is unlikely to raise its head since food inflation is going to remain low considering high stock to use ratio of Agri commodities  and cooling metals demand in China on account of lesser spending on infrastructure development. India and South East Asia are the only areas which will have massive investments in Infrastructure, but it is nowhere near China’s development at the moment. It may take a decade or more before the demand for the metals will start putting capacity constraints. Since China would provide broad stimulus in all shapes to keep its economy going, interest rates in China definitely would settle lower for the next decade or so. This itself would boost competitiveness for Chinese companies.  
5. USA champion of the free economy cannot compel its industry for not to buy from China. The freedom to make commercial decisions would remain with the corporates in the USA and the same will be given to the Chinese companies as well. This only suits Chinese companies as there will be no obligation on them to buy from the USA while they will get un-hindered US market access.  While trade agreement is being negotiated to reduce the trade balance, but it seems that onus of reducing the same with remain flatly with the USA companies and USA will have no chance to complain after the agreement. The cost efficiency will decide the terms of the trade and expect Chinese companies to win the game.
6. What else China can want. Stop the direct capital subsidy to the industry. This they would have done in any case for other than technology companies this year or in the next 2-3 years. This is a golden opportunity for China to agree and have legalized access to the US markets, something which they have been dreaming for a long time.
7. On the funding of the state companies for technology development, it can be done with the capital infusion on a commercial basis.  Governments all over the world including OECD countries do set-up 100% owned companies, which would have enough capital infused by the government and then it becomes unquestionable from the trade point of view. So, this agreement will not be able to stop government funding technology development in China. The color of yuan will not change, whether that comes in the shape of capital subsidy or capital investment.
8. China can continue the direct government subsidy for the development of technology through the university research programs, which the USA also do and therefore there can be no objection to that.

Problem areas for the Free trade: ( Market Access for the Financial and IT services will remain unresolved)                                                                   

a.       Actually, the USA would like to have free market access for the financial, IT services and other services. China has not opened these to the US companies and that is one area where China will have problems in opening that.  China is using its demand for the creation of its own products and not miss the technology development for AI and Machine learning which Europe has missed.    

b.      USA itself has never opened its financial, legal and maritime services to anyone in the world, despite pressure from all countries at WTO. Preaching China what they do otherwise would be difficult. At the moment USA would like China to understand this and open up the services on a non-reciprocal basis as other countries have done in the world. USA can bridge the trade deficit only when services are allowed to be directly exported to China.

c.       No wonder Chinese calling on USA to meet midway on these and conclude the agreement. USA seems to be on receiving end on this issue.  

d.      Will USA do this on a reciprocal basis and let China invade its financial system in years to come. This will not be possible considering the hue and cry created for 5G technology from H……. Therefore, this issue cannot be resolved and will be referred to future negotiations.   

IP Rights and Force Technology Transfer.          

It is a fact that China cannot grow more now by being a low-cost producer of goods to the world. The situation has changed, and China wants to emerge as a country of high tech products by 2025 (Program made in China 2025). China also wants to emerge as a supplier of artificial intelligence products and solutions, including high tech computer chips to the rest of the world by 2030.  For all these ambitions China needs technology.  The present regime and law facilitate this seamlessly. Chinese companies even when declared private are controlled by CCP and their legal system. CCP keeps absolute control on the companies and this is not going to change any time soon.

The Real question in the trade war with China is stealing the intellectual property and China changing its system so that IP Rights can be respected. If it is a court of law of a country, China can be declared guilty, but in sovereign countries negotiations, it would be impossible to make China admit that they do not respect IP Rights. USA and rest of the world could not do anything when China in the last 25 years has been manipulating its currencies.    

China at the moment is successfully playing the victim card.  Instead of China stealing the technology, now it looks like that USA is stopping Huawei to sell its 5G technology by unfair means.  The Negotiation on this account would be slow which will help China achieve its goals.  China on this account would keep making the changes in internal rules to look like they respect intellectual property rights.

It is interesting to note that Huawei has already announced an alternative to Google Android and 5G technology. They are ahead of making investments in Artificial intelligence and Machine learning as companies to the rest of the world.  With the backing of the local big markets and economy at $13 billion USD, China can undertake the technology development on its own as well.  Under the circumstances expect, China to announce new regulations for the intellectual property to give comfort to most companies in the world as they no longer need to depend on their technology. For information – Chinese companies are way ahead of others in making investments in AI. Baidu, Alibaba, and Tencent now have the deep pockets to take the development on their own.

Possible outcome- First of all negotiation would drag longer than expected for the next few months. In the end, it would be just an agreement on trade in goods and sugar-coated WIP on intellectual property rights and technology stealing. There is nothing more to this unless USA wants to be bold and derail the global economy by imposing tariffs on the additional import of goods from China.