The US-China trade relationship has been steadily deteriorating since early July of 2018, when President Trump finally followed through on threats to impose tariffs on Chinese goods. Since then, trade tensions escalated into a full out trade war, as each country imposed new tariffs on the other for new baskets of goods resulting in tariffs on hundreds of billions of dollars on each other’s goods. It seems now that both countries have reached the point where it will be difficult and potentially economically damaging to continue the trade war, and with signs of recent economic weakening for both nations, the time for a solution may be near.
On 1 December 2018, Presidents Trump and Xi met at the G20 Summit where they agreed to put the trade war on hold. Since then, trade negotiations have been in a state of truce, meaning the planned tariff increases on $200bn of Chinese goods from 10% to 25% that were supposed to go into effect 1 January 2019, were delayed for 90-days, or until 2 March 2019. This agreement was made so the two countries could spend more time coming to some form of agreement over a trade deal that the Trump administration has sought ever since taking office in January of 2016.
So where do we stand now? On 8 January 2019, US and China concluded their first official in-person talks, which took place between a relatively “junior” US and Chinese delegation, other than a surprise appearance of China’s Vice-Premier Liu He, which was seen as a sign of good faith by the Chinese. The main takeaways of the results of the talks were:
- An optimistic tone set by comments made by President Trump and Commerce Secretary Ross.
- A statement made by the USTR that specifically mentioned areas of ongoing concern, such as intellectual property and trade secret theft, forced technology transfer and pledges from the Chinese government to decrease the trade deficit with the US.
- The statement released by the Chinese was a bit more positive, as the Ministry of Commerce noted that the talks “laid foundations for resolving bilateral concerns.”
The lack of more tangible progress on policy was expected, given the low level negotiators present.
The result of these talks, though mixed, make us more optimistic for a more positive outcome in US-China trade relations, with that positive outcome likely to happen before the 2 March 2019 deadline. We believe the most likely outcome for these talks is a narrow-based trade deal that includes goods purchases and extends the truce period by some new set period of time, but leaves negotiations open for the more sensitive structural issues. We view this as being a positive for global risk appetite and would expect global markets to respond positively to any good news on this front. If progress falls short, the two other possible scenarios that we see as possible are:
- One, the deadline for the truce period passes with no deal, leading to tariffs on $200bn of Chinese goods to increase from 10% to 25%. This pessimistic scenario would likely give rise to increased risk to global growth, and would be received poorly by financial markets.
- Or two, the slight chance that a full trade agreement is secured, which we view as unlikely since it does not seem like there is enough time for a full trade deal to be agreed upon by the fast approaching date of 2 March. This would be the most positive outcome for markets and for the outlook for global growth.
Though we expect a positive outcome, we have recently seen Chinese economic data meaningfully weaken (trade, manufacturing data and inflation), which may provide some increased incentive for the government to reach a deal. Some US data have also weakened, and the recent declines in the US equity market also provides an additional incentive for Trump to secure a deal, in our view.
In the end, any final deal will need to be finalized by Presidents Xi and Trump, likely with a highly publicized trade meeting/summit and handshake. Important events coming up to watch in the ongoing US-China trade talks include the 30-31 January visit by China’s Vice-Premier Liu He to Washington DC for formal negotiations, and the 2 March US tariff deadline. This the date where, in the absence of an agreement or a further delay in the deadline, US tariffs on $200bn in Chinese imports will increase from 10% to 25%. The US has also threatened to increase tariffs on additional goods.