US-China Trade Talks: No Solution In Sight

The US and China meet tomorrow in an attempt to cut a trade deal. But chances are that protectionism will get worse before it gets better. US demands are too ambitious for quick fixes. The negative effects of higher tariffs are starting to kick in and economic growth will not provide much support to world trade either. Trade growth will drop to 1.3% in 2019.

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   US-China trade talks: little chance for a deal before the 1 March deadline

US-China talks resumed on 7 January in Beijing with both sides positive about the prospects for a deal, continuing the constructive tone that had taken hold since the American and Chinese leaders agreed to a ceasefire at the beginning of December. But as we expected back then (see Don't cry victory yet), optimism has since faded. Although China has recently made some advances towards the US, the American wish list is very ambitious and wide-ranging. Alongside a much lower bilateral trade deficit, US negotiators are increasingly insisting on fundamental changes in China’s industrial policy ‘Made in China 2025’. More transparent foreign exchange operations and the value of the renminbi are on the list as well.

We don’t foresee a deal on all these issues being agreed before the deadline on 1 March. Just last week, US Commerce Secretary Wilbur Ross said the two sides were ”miles and miles away from a resolution”.

  • So, in our base case, we expect the US to turn the heat on China by increasing tariffs on $200 billion of Chinese imports to 25% in 2Q from the 10% rate imposed in September.  
  • In a downside risk scenario, the US expands tariffs further in 3Q to Chinese imports which have not yet been hit by higher tariffs (around $260 billion worth of imports).
  • On the other hand, an upside risk scenario could see Presidents Jinping and Trump reach a deal. China has already announced various policy aims of market-based reform and a rebalancing of its economy. So one route to a solution might involve China “announcing” a timetable of implementation (as seen in the 2018 announcement on liberalising the exchange rate and foreign investment regime) and agreeing to strengthen enforcement, with sanctions to be imposed in the case of no compliance. In this upside risk scenario, all tariff hikes from both sides thus far would be undone. That delivers a positive impulse of 0.6 percentage points for trade in 2019 (chart 1).  

We think it is almost impossible to reach such a deal before 1 March. So, if the upside risk scenario happens at all, it would happen later (3Q we assume) after the US increases pressure in 2Q.

Chart 1: Effect of tariffs on world trade, three scenarios

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Gary Anderson 1 month ago Contributor's comment

The world will have no choice but to unite against the USA. There is evidence this is happening. Trump is playing with fire and the risk of America being burned is increasing.