Former ambassador assesses US-China trade deal

A trade deal between US and China could end the uncertainty but it won't do anything to help the trade deficit, according to Capital Group vice chairman Michael Thawley.

The former Australian ambassador to the US spoke at the Financial Standard Chief Economists Forum this morning in Sydney.

"There will be some sort of deal - to postpone the tariffs or maybe in some time, to get a lighter agreement on Chinese purchases of agricultural goods, energy and foreign investment rules," Thawley said.

"What we also know right now is that any deal will not fix the trade deficit that Mr Trump worries about."

US President Donald Trump's State of the Union address this week pegged reducing the chronic trade deficit as one of the key points for negotiating a new trade deal with China. The US Treasury Secretary Steven Munchin is due to visit Beijing next week to negotiate, as the clock ticks on the US's Chinese imports that could be charged a 25% tariff (up from 10%) starting March 2.

"This is not a Trump issue - we tend to talk about it like that but it is a bi-partisan view of democrats and republicans, the congress and most of the business community in the US who share a view that something needs to be done regarding the engagement with China," Thawley said.

He said, economically China is too big to ignore, unlike the much smaller economy of the Soviet Union in the cold war.

China enjoyed 20 years of integrating into the wider world economy. This period ended when Xi Jinping came to power, even if it wasn't realised at the time, Thawley said.

"People were very slow to understand just how ambitious Xi Jinping was when he came to power and that how fast he would move to achieve that ambition," he said.

"The US-China economic relationship will never be the same again.

"My colleagues kept on saying to me you know, there is so much common interest there, surely there is going to be some understanding reached and all this unpleasantness will be over."

A changing global economic order

Thawley said there are three main dynamics for the changing global economic and strategic order. And each is interacting with the other and intensifying the collective impact.

First, the current pattern of economic growth is coming to an end. We have had a period of accelerated global economic growth around the world driven by "opening up" or liberalistaion of capital and trade and movement of people.

The second dynamic is that the global strategic order dominated by US's military and economic power is now being destabalised.

"The third, the weakness is that the weakness in western political institutions [the splintering of politically parties and community] into narrowly focused interest groups and identity groups which has lead to the governments being unable to act even where they know what they need to do and we are seeing weak governments and generally, a loss of confidence in the western political structures," he said.

"Economic income inequality adds to this issue and what we see countries are increasingly turning to protectionism, more state intervention higher taxation and even amongst traditionally free market parties."

Read more: Capital GroupMichael ThawleyXi JinpingDonald TrumpFinancial Standard Chief Economists ForumUS Treasury Secretary Steven Munchin
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