Yesterday the S&P 500 pushed 5-month highs going above 2,850 momentarily, partly due to an impending new round of trade talks between the US and China. Today, right on cue, doubts over an eventual encompassing deal have resurfaced and US markets retracted from yesterday’s highs. Yet, it is certainly conceivable that a partial deal could still come to be arranged in the coming weeks.
So far it’s been interesting to see how, although the US led the charge on imposing tariffs, Trump and his negotiators have more or less taken the lead from China’s diplomats on the broader contours of a possible agreement. Perhaps this is partly due to the divided house in the US where the Administration wavers between prioritising shorter-term bilateral trade deficit solutions and the longer-term structural resolutions; essentially the focus on either dissolving all retaliatory tariffs versus gaining impactful concessions on intellectual property rights and the current technology transfer pressures (although not laws) for US-China joint ventures.
China’s strategy may well be to entice Trump with the appearance of a public win, by immediately withdrawing tariffs and offering to buy more agriculture and energy products, perhaps agreeing to prevent the renminbi from any devaluation (against either the dollar or a basket,) and relaxing barriers to US companies entering the domestic market – but simultaneously offering fewer concessions on the structural changes that were the original motivation of the Section 301 tariffs.
The rhetoric around near-term concessions has included increasing imports of farm-goods by $30bn – which when pre-tariff imports stood at $20bn (a 150% increase) would undoubtedly cause a glut. It also has included talk of numerous multi-decade oil and LNG deals which seem more realistic and mutually beneficial as China’s energy needs continue to grow (and coal usage targets decline) and as investment in the US shale oil and gas industry matures. Other possible concessions are ill-defined with terms like “market distorting subsidies” surely meaning very different things to each party, but may be agreed to in principle to reach a partial agreement even if they are still no closer at all to a true resolution. If such a partial deal transpired it’s likely the US would correspondingly drop their $200bn in tariffs whilst upholding the original $50bn in tariffs until a full agreement is enacted.
Following the recent National People’s Congress in China it seems that China is again targeting growth stimulus measures – after realising the delayed growth impact of broad-based policy tightening earlier in 2018. Finding an accord in trade negotiations with the US will certainly be a key part of boosting growth to the new 6% - 6.5% range, but it’s clear they have no intention of being a push-over. Of course, there are still innumerable things that could upset any full or partial agreement: from a significant economic shock in China to simply Trump getting out the wrong side of bed and seeing China as the biggest winners from the current tabled deal.