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US-China Trade Talks – Likely Extension of Trade Truce also Means Extension of Uncertainty and Market Volatility

We refrain from overtly optimistic over US-China trade negotiations. Following US officials’ Beijing trip which included a meeting with China’s Xi Jinping on Friday, both countries released their own statements. Yet, the tones of which suggested that discrepancies remain. While the market appears thrilled by the likely extension of the trade truce, possibly by 180 days, it also means extension of uncertainty and volatility in the financial markets.

In China’s statement, “consensus” was the keyword. It emphasized that both sides “earnestly implemented the consensus” reached at the G20 summit last December and reached “consensus in principle on major issues” with a view toward a “memorandum of understanding on bilateral economic and trade issues”. However, the US made no mention in “consensus”. While acknowledging “detailed and intensive discussions”, it stressed that “much work remains” and any commitments agreed upon will be “stated in a Memorandum of Understanding between the two countries”.

China emphasized the issues discussed were of “common concern”. These include “technology transfer, protection of intellectual property rights, non-tariff barriers and balanced trade”. The US, however, noted that the “structural issues” discussed include “forced-technology transfer, intellectual-property rights, cyber theft, agriculture, services, non-tariff barriers and currency”. The US also noted the discussion of “China’s purchases of United States goods and services intended to reduce the United States’ large and persistent bilateral trade deficit with China”. Interestingly, this was not mentioned in China’s statement.

Foreign policy is an extension of domestic policy. Apparently, the statements released by the two governments target their own people. Toughness on trade issues and insistence on construction on Mexico border wall are Trump’s major strategy for reelection. As such the US statement inevitably sounds aggressive and keen on putting pressure on China. Nationalism is a key tactic not only employed by Trump. Xi, struggling to maintain his support as the leader of the authoritarian government, has nothing but nationalism to grip on given the country’s economy is facing severe slowdown. China’s statement, thus, has to refrain from sounding compromising and focus on “mutual” benefit.

Of the various demands requested by the US, some can be satisfied by China while others are non-negotiable. In our opinion, the former covers merchandise trade, which could help the US narrow the trade deficit with China. China could agree to increase purchase of US goods, in particular from states that would help Trump in the reelection. As mentioned above, the US is also concerned about “forced-technology transfer, intellectual-property rights, cyber theft”. We do not expect a short-term solution on these issues. Indeed, we do not expect a solution in the longer-term, either. While China might want to buy and show willingness to negotiate on these issues, it would likely compromise.

US tariffs on U$200B worth of Chinese imports are scheduled to rise to 25% from the current 10% if no deal is reached by March 1. It is highly likely that Trump would agree to extend the deadline. The extension means both sides have more time to negotiate. While China could eventually agree to import more US products, little would be achieved on the “new economy” issues. It remained uncertain whether Trump would agree on such outlook. As such, the extension also means more uncertainty and volatility on the financial markets.

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