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Chinese whispers; LETTERS TO THE EDITOR.

Financial markets have recently recoiled at the sudden deterioration of US-China trade relations. Determining which party is in the wrong is no easy matter.

Some of the American desire to rewrite trade deals is built upon a shaky foundation: the US trade deficit is as much a function of US spending decisions as Chinese production choices, the woes of US manufacturing workers have more to do with automation than outsourcing, and China's exchange rate is not especially undervalued.

That said, the White House does have a few legitimate grievances. US companies pay slightly higher tariffs on average when entering foreign markets than their foreign counterparts entering the US. China benefits from a particularly asymmetric relationship due to its unorthodox combination of capital controls, stateowned enterprises, and intellectual property practices.

Until recently, China had seemed to be inching toward genuine concessions. But the country's latest proposal abandons much of the reform language, prompting a tit-for-tat volley of new tariffs that approximately double the damage inflicted by protectionism on the two economies. This is not enough to induce a recession by itself, but could undermine recent green shoots of growth.

Fortunately, not all hope is lost: neither country wishes to stumble economically and both have delayed their new tariffs for long enough that a constructive dialogue could yet emerge. But so long as the US continues to demand changes to the very foundation of the Chinese economy, an accord may prove elusive.

Eric Lascelles, chief economist, RBC Global Asset Management

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Publication:City AM (London, England)
Article Type:Letter to the editor
Geographic Code:9CHIN
Date:May 16, 2019
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