Two days of US-China trade talks are over. There was no big trade deal but an agreement to keep on talking instead.
Trade talks are likely to go on for a long time it seems. Some big issues are outstanding according the media reports. The interesting thing now will be whether Trump holds off from announcing details on tariffs on the additional USD100bn worth of Chinese imports or not. It will probably take some weeks before we know. He might do it to put more pressure on China, but might also hold fire as long as talks continue. He stated yesterday he might meet with Chinese President Xi Jinping soon.
Apparently, the US has asked China to reduce the trade deficit by USD200bn by end- 2020. It is very unlikely that China will agree to this, as it sees the US trade deficit with China as being due in part to low US savings, over which it has no control. According to sources, the other US requests going into the negotiations were (1) a halt to some subsidies for Made-in-China 2025, (2) to strengthen IP protection and enforcement and (3) to reserve the right to impose additional tariffs while asking China to avoid retaliatory action.
On halting subsidies in Made-in-China 2025, China will be reluctant, as this is a cornerstone in moving towards the next step in its development by improving productivity through investment in technology and innovation. China sees a case for subsidising sectors that have positive spill-over effects on the whole economy – which makes sense according to economic text books when so-called ‘positive externalities’ are in place. However, it is a point that both the US and Europe view as a threat. China sees the US demands partly as an attempt to hold China back, which will not be allowed.
On the second point of strengthening property protection, China is likely to meet the US. China has in fact worked on this for several years now and has taken steps to improve enforcement and increase fines for stealing property rights. With innovation being a corner stone in China now, protecting property rights are crucial for Chinese companies as well.
Uncertainty to linger for some time
On Wednesday, a Xinhua report (Chinese news agency) stated that the US should show sincerity in trade talks instead of making unreasonable demands. It might have been a response to the US wish list going into the negotiations. However, on Friday, a Xinhua article struck a positive tone while also stating that ‘considerable differences still exist’.
It seems clear that the uncertainty over a potential trade war will linger for some time. Key to watch now is whether the US will actually implements tariffs on China after the hearing period is over and whether it will proceed with details on the further USD100bn worth of Chinese imports subject to tariffs. If it does so, it would lead to another escalation, as China would retaliate immediately. There are stories that China has already started to divert purchases of soy beans away from the US to other countries, which, if true, will hurt farmers in some of the important political states for Trump. We continue to look for a solution in the long term, but it is likely be a rocky road along the way and it cannot be ruled out that it could get worse before it gets better.
