Trade deal leaves considerable uncertainty

G20

President Trump decided to sit down with President Xi after all at the G20 Summit in Argentina. He had blown hot and cold about whether it was worthwhile to do so, and had threatened to carry on with his increases in tariffs on Chinese goods ahead of the meeting. Markets should be growing used to his negotiating style, where he regularly talks tough before a meeting or event in the hope that the counter party will come with something to offer. On this occasion it is not clear what – if anything – has been agreed. The two men seem to have had a civil conversation about their respective concerns over dinner with their senior advisers present. They seem to have left a great deal to the talks which should follow as others try to craft an agreement out of the high level messages the two Presidents communicated.

The two sides had different priorities in the talks and this is reflected in the different statements made after the meal. China was pleased to report continued US acceptance of the One China policy, and to confirm there are no immediate threats of higher and more wide-ranging US tariffs. The US was keen to report the apparent offer of a reduction in tariffs on cars into China, and to tell us that just 90 days has been allotted for the talks to find a deal before the US moves to increase tariffs. Both sides need to clarify their bottom lines and their degree of flexibility, as both need to give considerable ground from their opening positons in order to reach an agreement. So far China’s offer to buy more US goods is insufficient.

The US wants progress on the issue of intellectual property (IP), where they argue that China steals or forces IP out of US corporations wishing to trade with China or invest in China. The Chinese are now responding by saying they too wish to enforce rights to intellectual property, and will make a suitable declaration of intent. The issue is likely to be one of trust and whether there can be something more than just a general statement of better conduct in the future. The US is also concerned about cyberattacks.

The US wants China to lower some of the asymmetric and high tariffs she imposes on imports, when she gets more favoured access to western markets. This is easier to assess and police, but so far there has been no published schedule from the Chinese side of what they are prepared to offer by way of tariff reduction.

The US wants continued freedom of access to the South China Sea, and wishes to make a stand against undue military expansion through the islands and rocks that China is claiming, expanding and fortifying. The US will wish to continue naval patrols close to Chinese territorial waters in ways which the Chinese find vexatious.

We have learned in recent weeks that President Trump worries about falling equity markets, as he claimed some credit for rising markets earlier in his presidency. He is clearly worried that the bad news on trade and tariffs is another cause of market jitters, which he would like to resolve. He is also very conscious of the pledges he made to industrial workers in the US, where he told them that Washington needed a better trade deal with China to protect jobs at home. He is taking time to find the balance point, and the Chinese are playing it long. The relief rally that the two men met and got on again was short lived, as we await any real breakthroughs on trade, tariffs, intellectual property, investment conditions and naval access.

 


The above article was previously published by Charles Stanley on 5th December 2018