US-China – Towards a trade truce?
Our central scenario has long been that we would see some lowering of US-China trade tensions ahead of the US presidential elections. But deep-seated issues may prevent a major breakthrough.
President Trump is considering offering a ‘limited’ or ‘interim’ trade agreement to China as his advisors prepare the ground for face-to-face talks scheduled for October. He has notably announced that the additional 5% tariffs on Chinese goods scheduled for early October were being pushed back to the middle of the month.
This initiative marks a notable de-escalation of the US-China trade dispute after a tumultuous month of August, which saw the Trump administration imposing new tariffs on Chinese imports. The Treasury department also designated China a “currency manipulator” in August after the Chinese yuan depreciated against the US dollar, theoretically opening the door for additional trade penalties.
Trump said his recent trade overtures were a ‘gesture of good will’ ahead of the 70th anniversary of the People’s Republic of China. China has reciprocated by starting to purchase US agricultural products again, has lifted some restrictions on foreign institutional investment and lifted tariffs on some US goods affected earlier by tariffs. Yet the Chinese government’s trust in Trump may be running thin, given the latter’s repeated flip-flopping on trade, and we continue to believe that a comprehensive deal, which would encompass thorny intellectual property issues and lead to a removal of all tariffs, is very unlikely.
Fed Chairman Jerome Powell has shown he is sensitive to potential harm from the trade conflict. The uncertainty about future US-Chinese trade relations was a big reason for the Fed’s 25bps ‘insurance’ rate cut in July, and for a further potential cut at its 18 September meeting. Nevertheless, the Fed is still likely to cut rates in the near term. We feel that Powell will not take a trade truce with China at face value, and will insist instead on the underlying, structural divergences in the US China relationship as well as on the truce’s fragility.
We still interpret Trump’s latest moves as more a pause in the trade dispute rather than an inflection point, most probably to assuage growth and stock markets ahead of the 2020 elections—but we still see fundamental issues making a durable trade deal with China a tall order. One reason is that Trump’s tough stance on China is still seen positively in the Rust Belt states. In a nutshell, trade tensions are likely to continue to bubble in the background.