In-depth

Trump’s ZTE deal is no U.S. win

Xinhua Financein The Wall Street Journal
2018-05-18 14:38

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Investors will likely celebrate easing trade tensions. 

Qualcomm’s deal plans and tariff-free U.S. pork in exchange for ZTE Corp.’s continued existence—that appears to be the upshot of U.S.-China trade talks.

Whether Chinese telecom leader ZTE willfully violated the terms of its settlement with the U.S. government over sales to sanctioned Iran now appears irrelevant—barely a month after the Trump administration banned American firms from dealing with the company.

Now, the U.S. has weaponized Iran sanctions and a Cold War-era national-security law, the legal basis of President Donald Trump’s steel and aluminum tariffs, for mercantilist ends—precisely the sort of arbitrary enforcement of law that infuriates Western businesses in China.

What does this mean for investors?

First, Beijing will see the U.S.’s obvious desire to water down agricultural tariffs ahead of the midterm elections as validating its strategy to go after Mr. Trump’s political base, weakening the administration’s hand in future negotiations. Extracting meaningful concessions that could help a broad range of businesses, instead of just a few, will become more difficult.

Second, other big trading nations and multinational companies watching the U.S. use national-security legislation and sanctions to resolve trade disputes may conclude that the rules-based international trade system is in permanent decline. Companies will intensify lobbying to protect themselves and new trade barriers will spring up. And global manufacturers may curtail investment in global supply chains—ultimately pushing up costs, and inflation.

Those might seem abstract considerations. Over the long run they can matter a lot. The long-term decline of inflation in advanced economies since the early 1980s has many causes, among them graying populations, the rise of automation and regulatory reforms. But the emergence of global supply chains was certainly a significant factor in the early 2000s, during the last big synchronized global growth uptick: U.S. goods imports from China in 2007, for example, were cheaper than in late 2003, according to the U.S. Bureau of Labor Statistics.

That price competition was painful for some developed nations’ manufacturers and their workers, but it also helped keep prices for consumers cheap when oil prices were rocketing and real wage growth was moderating.

Global growth has finally shown signs of life over the past year. If the world economy keeps growing steadily—and global supply chains start to get Balkanized again—don’t be surprised to see inflation return as well.

Source:  The Wall Street Journal
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