China Was Desperate For A Trade Deal, But The G-20 Agreement Is A Mirage

China cannot maintain its growth – based on a huge debt bubble – if its exports to the US fall. There is no other market that can offset its exports to North America. And its trade surplus with the United States is already over 275 billion dollars per year, the biggest contributor to the Chinese GDP from the external sector.

A drop in the growth of China’s exports would mean a much larger collapse of its foreign exchange reserves, which are down 30% since the 2014 highs.

A collapse in foreign exchange reserves also accentuates the already existing capital flights, which in turn would lead to more capital controls and, with it, three effects. Lower growth, an increase in the already high debt and the risk of a very important devaluation of the yuan.

These three effects have already happened in 2018.

In summary, for China, the trade war is devastating. For the US it is negative, but for China, it is a disaster.

The United States exports very little (11% of GDP), so any threat that leads to an agreement is good.

A trade war can generate higher costs of goods and services for Americans, but the reality is that China exports disinflation and, if any, inflation expectations are falling, not rising.

This does not mean I support trade wars. It means that the idea that both sides are equally negatively impacted is simply empirically incorrect.

As such, the agreement announced between the US and China in the G20 is nothing more than a “conditional ceasefire”.

China has little intention of guaranteeing intellectual property and eliminating capital controls or the immense interference between political and legal power.

The increase in purchases from China to the United States announced is likely to have a very low impact on the trade surplus. China’s trade surplus with the US has skyrocketed in 2018 from 21.9 billion dollars in January to 34.1 billion in September. If China doubles its purchases of agricultural and energy products from the United States, something very difficult to achieve, this surplus would only fall by a maximum figure of 3 billion US dollars.

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