The applause round the table at the end of the Trump-Xi dinner in Buenos Aires paints an overly optimistic view of the trade conflict moving towards resolution. Trump’s agreement to delay the scheduled January increase on US$200bn Chinese imports from 10% to 25% represents a temporary cease-fire rather than a de-escalation. The pause will allow negotiators to kick off a 90-day process, which looks set to be dominated by the same points of disagreement that plagued previous talks.
The “deal” reached for China to increase imports of US agricultural goods, energy, and industrial products comes at a time when Trump is facing negative press about the domestic price of the trade war, notably soybean farmers, who are being forced to leave produce rotting in the field, as Chinese imports declined by 94% yoy in October. As he boarded Air Force One, Trump framed the deal as having “an incredibly positive impact on farming”. Xi’s promise both to toughen up on fentanyl used in the manufacture of opioids and to re-consider China’s blocking of the Qualcomm-NXP deal can, meanwhile, be packaged as political wins, whilst not affecting trade.
The two leaders thus each flew off with something to sell to their domestic audience. But the gap in the US and Chinese fundamental positions remains huge and official accounts have led some to jokingly question whether Trump and Xi were even attending the same meeting. The White House statement says that, if the “parties are unable to reach an agreement”, tariff escalation will go ahead. By contrast, China’s state news agency Xinhua made no mention of how tariffs will be implemented if no agreement is reached. The Chinese line that reforms will be done in “accordance with the requirements of the 19th Party Congress” rather than in reaction to US demands is likely to be seen in Washington as evidence that China is marching to the political drum beat rather than engaging in a real dialogue.
Such differences point to a fractious negotiating environment when the two sides meet. A chasm continues to separate Beijing and Washington’s view of their trading relationship, notably we argue on the future of Chinese high-end technology and IP protection. Staunchly committed to the Chinese economic model, Xi will continue to lend state support to targeted industries, particularly in technology under the Made in China 2025 programme. Given the differences instarting positions, with the Chinese side setting red lines around its state-led system, it is highly unlikely that the time-frame of 90 days will allow the US to extract concessions Trump could present as a large-scale “win” with any degree of conviction.
After negotiations in May and July failed to provide an off-ramp, Beijing began to articulate a strategy which amounted to waiting for a change in the US political climate that would lead to a normalization of economic relations. The impetus to protect the economic model the leadership views as under attack from the US means that China will now seek further delays to the ratcheting up of tariffs, rather than offering concessions in its long-term vision for the economy.
The outcome of the Xi-Trump meeting does not change our expectation for a deceleration in Chinese export growth in Q1/19. Frontloading of US imports from China has already occurred this quarter, ahead of the now delayed tariff hike. US importers’ inventories are full and trade credit exhausted, leaving them with limited scope to further frontload purchases over the 90day period. On the Chinese side, our conversations with export manufacturers confirm the view from new export order PMI’s, which have been below the 50-point expansion mark for six consecutive months (see Chart 2 below) – pointing to a decline in export growth in Q1/19.
The key question is whether, if negotiations fail to bridge the gap, Trump decides to press ahead with tariff escalation, or whether the talks are further extended- allowing him to maintain
pressure on China whilst mitigating the effects of tariff increases on American consumers and inflation. Pressing ahead with escalation would be a win for the Lighthizer/ Navarro camp and their long-term goal of US-China “de-coupling”. Whist Lighthizer has consistently proven himself to have influence in directing Trump’s negotiating position this year, he will be dealing from now on with a president seeking re-election who is faced with a slowing domestic economy and a less buoyant stock market. Together with the outcome of the Buenos Aires meeting, this backs our view that we are past “peak Trump” aggressiveness with regards to China.
The political and economic environment that informs Trump’s decisions on China have changed substantially from his surprise decision in May to reject the first deal cut by Wilbur Ross. This is only set to continue as he faces the slowing economy, with the positive effects of tax cuts starting to peter out, and the negative effects of the trade war starting to weigh on companies and the market. This, in turn, will cut into the president’s ability to pursue further escalation, particularly since the next scheduled round of increases would have a more direct impact on consumers than those already implemented. Since the US and China will find it impossible to match up their vision for the future, we are therefore likely to see stagnation in talks amid further delays to threatened tariff escalation.
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