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US-China trade truce is just an interlude

Main takeaways

1. As we know, the US had suspended further tariff measures planned for 90 days, pending talks with Chinese officials designed to end up in commitments on the part of the latter to increase purchases from the US – promises that have been made before and to no great applause in the end – and to address critical issues of concern to US businesses regarding industrial policy, the policy of indigenous innovation and overall, China’s technology policies.
The announcement that USTR Lighthizer will take charge of negotiations with China suggests that he continues to have the President’s ear and will give the US negotiating position the backbone already evident.
2. While the ‘truce’ is welcome, and has been received positively by financial markets, it is more than likely a phoney war in an otherwise deep commercial conflict, the causes of which will not be addressed in 90 days or even any time in the foreseeable future, unless one side gives up.
The acid test of whether this trade war will cool down or end will be down to whether China makes the required structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. The answer is certainly not in 90 days, and most likely not as long as Xi Jinping feels it inappropriate to do so or under no Party pressure at home to shift positions.
3. The statements issued by the US and Chinese governments after the meeting of Presidents Trump and Xi don’t even align well – see – and make for an inauspicious start:
– the Chinese statement and media don’t  refer to the 90 day deadline;
– they affirm that China will continue to develop reforms and policies in the wake of the 2017 19th Party Congress but not as a response to joint negotiations with the US as a result of the latter’s request;
– they argue the US will address trade and  economic issues that concern China, and that the US goal is to terminate the tariffs imposed this year. The same comment has applied to suggestions that China might lower tariffs on auto imports from America, raised earlier in 2018.
– it’s almost as if Beijing is presenting the US as having unilaterally abandoned the trade strategy it has developed in the last year
4. The US position on these matters is well known and clearly not corroborated as in line in official statements.
5. But it suits both sides to play for time. For Trump, it gets the US through the festive period and through a period of slower growth at home, and gives him an opportunity to demonstrate ‘reasonableness’ – including at a time of growing political pressure at home.
For Xi, whose China will celebrate the new Year of the Pig inside the 90 day period, the time bought may be more valuable still. The economy is slowing significantly, policy has been eased to little avail so far and a new stimulus strategy may already be in the pipeline. Within the coming month it’s expected to be flagged in the Economic Work Conference. Time gives China the opportunity to pull back a bit, perhaps, not least because the original White House tariff proposals would have had a much more significant downside impact on China’s in 2019 – perhaps as much as 1-1.5% GDP – than this year’s measures have done and which were mostly offset by modest policy easing and an 8% depreciation in the RMB.
6. The next way station  as to how far China has bought into the US agenda for change will be on 18 December, when Xi is due to mark the 40th anniversary of Reform and Opening Up with a speech. Judging by the Xi’s China track record on reform and opening up, and on the content of the Reform and Opening Up exhibition in Beijing’s National Museum which reportedly mostly features Xi, himself and downplays or ignores Deng Xiaoping and Zhu Rongji –  we should not get our hopes up too much.
7. I expect the trade truce will expire on or before the 90 day deadline, leading back to where we were before the Buenos Aires posturing.