China-US trade agreement is anything but new version of ‘Plaza Accord’ sequel

By Shen Jianguang Source:Global Times Published: 2019/3/3 20:08:39

Illustration: Xia Qing/GT

After seven rounds of repeated negotiations, the China-US trade talks seem to have made a breakthrough. US President Donald Trump tweeted the US had "very productive talks" with China on trade. He also announced he would delay the scheduled March 1 tariff increase on Chinese goods.

However, some have grown suspicious over the two countries' negotiations on exchange rate matters. Some have even criticized that China's promise to keep the yuan's exchange rate relatively stable under external pressure is, in fact, a new version of the "Plaza Accord," a deal reached between Japan and the US in the 1980s amid the US-Japan trade war which resulted in the yen's appreciation. 

However, the China-US trade agreement is no Plaza Accord. It's not as easy for the China-US trade talks to overcome obstacles that could prevent further trade friction escalation between the two countries. 

Judging from the current results, both China and the US are searching for a win-win middle ground. Not all matters on the US negotiation list were approved by China, while China's promise to speed up reform is also in line with its policy direction to speed up market-orientated reforms in various areas, which was proposed during the 19th National Congress of the Communist Party of China. 

With the China-US trade agreement, the US requested that China must not lower or manipulate the yuan's exchange rate to boost exports, if anything a superfluous clause. 

It's not a feasible move to stimulate exports via currency depreciation, nor is it a policy option for China. It's not only the premise for financial stability but also one of the Chinese government's long-term policy targets that the yuan should remain basically stable. 

With China's general economy, the yuan does not have the foundation for depreciation. Although the yuan experienced depreciation pressure last year, it has since shown an appreciation trend. China's economic bottom under policy support along with the gradual ease of external pressure both helps the yuan to remain relatively stable for 2019.

Besides, considering how the domestic and overseas environment that China faces now is very different from Japan in the 1980s, calling the US-China trade agreement the second "Plaza Accord" is nonsense. 

For one thing, China and Japan's market scale impact the US differently. In 2018, China's GDP accounted for 70 percent of the US GDP. During the Japan-US trade war, Japan's GDP only accounted for 40 percent of the US GDP. 

China has shifted its economic growth impetus from exports to consumption. Its retail scale has grown from roughly 25 percent of US retail volume 10 years ago to a scale equivalent to the US retail market in 2018. In comparison, by 1985, Japan's retail market was only a third of the US market. 

China and Japan have different policies when dealing with US trade disputes. With the Plaza Accord, Japan chose to restrict the scale of exports via yen appreciation, while China planned to open up its markets voluntarily and expand exports from the US. 

Ten years after the Plaza Accord was signed, the US dollar exchange rate slumped almost 50 percent against the yen. The yen's substantial appreciation prompted the Japanese government to adopt an overly loose monetary policy, which later triggered an economic bubble burst. China has always made efforts to keep the yuan's exchange rate stable. The country has not used the exchange rate to adjust trade. 

At the same time, the China-US trade agreement has covered market opening-up and strengthening intellectual property rights protection which is what the Chinese economy needs. Although China's economic growth rate has slowed, policy support strength has intensified. Therefore, it's pessimistic to call the ongoing trade agreement a Plaza Accord sequel.

It is incorrect to think the US has nothing to lose from the trade friction. Instead, reaching a compromise with China is also appealing for the US. Particularly as China has risen to be the center of the world's supply chain and the world's factory, many of its exports to the US are manufactured in China by US-invested companies. Therefore, Trump's threats to levy duties on commodities would also bring losses to US enterprises and consumers. 

The path for China-US relations is not a smooth one. Next year's US presidential election, the uncertain nature of Trump's trade policies, populism and the rise of China's high-end manufacturing and rapid development of its science and technology sectors, the political wrestling between both the two will only extend into other areas and onto deeper levels. As China-US relations advance, twists and turns can be expected.

The author is chief economist with Jingdong Finance.


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