30 November 2018
Deal vs no deal
As things stand, the US is planning to raise existing tariffs on $200 billion worth of Chinese goods, to 25 per cent from 10 per cent from January. Trump is also threatening to impose tariffs on a further $267 billion of Chinese goods. But recent stock market volatility, continued tightening by the Federal Reserve, US soybean crops previously destined for China rotting in fields, and General Motors’ announcement this week of 14,000 job cuts may have given Trump some reasons for pause.
Indeed, US Chief Economic Adviser Larry Kudlow said on Tuesday that the President was open to the idea of a deal. But Trump himself has continued to be combative, and in an interview earlier this week reiterated his threat to impose new levies on Chinese imports if no deal is reached.
In our view, the best-case scenario would be an immediate truce in the form of an agreement delaying new tariffs for several months, while the US and China try and come to a longer-term solution. While less appealing, another form of truce could be where the overall tone of the meeting is positive, leading to a postponement, but not cancellation, of the additional 25 per cent tariffs.
On a recent trip to China, it was clear that the slowdown in economic growth, mainly due to deleveraging the banking system, was the biggest worry for locals. While trade wars are front-of-mind globally, they were notably a good few notches lower on their list of concerns.
We got the impression that Beijing has shifted its thinking on trade wars in the past two to three months. They have realised that this is  not just Trump;  not just Republicans;  not just about the trade deficit and  not going away. This is, in some way, an improvement - the sides are no longer talking past each other.
The sentiment appears to be that Xi sees the threat of tariffs as a US containment strategy, and that Beijing is unlikely to give enough ground to satisfy US concerns regarding state-owned enterprises and subsidies reform. Another view that came to the fore was that Xi thinks his domestic policy is right for China, and that China’s domestic market is big enough to offset a US export slowdown. All this has emboldened the hawks around him.
Our view is that while Beijing better understands the ‘problem’ now, the underlying strategy seems to be to continue at full speed with the domestic policies that the US has issues with - i.e. China First, but with the rhetoric toned down. Indeed, we worry that Xi is ‘not for turning’ on either domestic or foreign policies. As such, the risk is that 2018 was only the start of the pain, not the end.
The Buenos Aires summit could end in some form of truce; equally we worry that the hawks around Trump and Xi will prevail, and neither side will be willing to compromise enough to end this stalemate.
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