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IMF study attacks 'transactional' US-China bilateral trade deal

by Bob Lyddon

The International Monetary Fund have issued a detailed study on the possible impact of a so-called "transactional" trade deal, which is being contemplated as a way of solving the current USA-China trade stand-off. It is entitled "Trade Wars and Trade Deals: Estimated Effects using a Multi-Sector Model".

The objective of the deal would be to reduce the trade deficit that the USA runs with China, perhaps by 50% but not necessarily by 100%. The mechanism would be that China agreed to buy certain goods from the USA, and therefore not from elsewhere, and China would in exchange reduce its exports in certain sectors.

Sounds good, if you are based in South Bend Indiana and produce one of the lines of goods that China would buy more of.

Less good if you are in Bamberg Bavaria and produce the same goods, but now your order book goes off a cliff.

Less good, also, if you are in San Jose California and require supply, and even an expanding supply, of the goods that China is going to export less of, and where there is no obvious alternative source of supply, such as of certain rare earth metals needed by the technology industry.

An opportunity, of course, for a middleman to corner the supply of those goods, buy from China at a higher price, and sell into the USA at an even higher price, pocketing a fat margin but also increasing the import value of the goods from China, counteracting the intention of the trade deal.

There are probably many more anomalies that such a deal would create for both the USA and China, and for third countries impacted by a government-inspired redirection of trade flows. There is an issue of quality and value-for-money whenever there is a captive market and no alternative source of supply, reduced competition, and easy pickings to be made.

In fact one can look forward to an expansion both of TAT ("Transaction-deal Affected Trade") and of tat.

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