The stakes are high for the global economy as U.S. and Chinese negotiators restart trade talks this week after months of silence and tit-for-tat tariff increases.
As economic growth continues to slow, both China and the U.S. have motivations to reach some sort of accord that eases the trade war. In recent weeks good-will gestures raised hopes that a deal was possible, even if it only offered a face-saving way for both governments to de-escalate.
However, both also have dug in to such a degree that a major breakthrough seems highly unlikely.
Sensing weakness, China is reportedly set to narrow the scope of what it is willing to broach with the U.S., scrapping offers of any substantial reform of Chinese industrial policy, according to Bloomberg. With the U.S. economy showing signs of weakness, and, crucially, with President Trump engulfed in an impeachment inquiry that threatens his presidency, Beijing apparently feels that it has the upper hand and does not need to make major concessions or rush to ink a deal.
China is “interpreting the impeachment discussion as a weakening of Trump’s position, or certainly a distraction,” Jude Blanchette, an expert on China’s elite politics at the Center for Strategic and International Studies, told Bloomberg. “Their calculation is that Trump needs a win” and so will crumble in trade talks with China.
The possible hardening position from Chinese negotiators comes as news reports surfaced last week that Trump seemingly offered in a phone conversation with Xi Jingping earlier this year to refrain from criticizing any crackdown of Hong Kong if the Chinese government investigated Trump’s political rivals. U.S. Congressional investigators are surely adding the episode to the stack of evidence as part of the impeachment inquiry.
But China, too, has reasons to strike a deal that removes tariffs. The Chinese economy has slowed dramatically this year, and with the Hong Kong protests making international news, Beijing can ill-afford more unrest. The flip side is that Xi Jingping does not want to appear weak vis-à-vis negotiations with the U.S. as he tries to stamp out Hong Kong protests. The pressure cuts both ways.
Bloomberg reports that the U.S. envisioned a three-step process to trade talks, which included China buying American agricultural and energy products, then a reform of Chinese industrial policy and intellectual property policies, and only then a removal of tariffs. But that vision seems to be a heavy lift if Beijing comes to the negotiating table having already scrapped any notion of industrial policy reform.
That doesn’t necessarily ruin the odds of a “mini deal,” which at a minimum would head off further escalation. Trump is increasingly desperate to shore up support in the rural Midwest, where his trade war and ethanol policies have strained what has otherwise been a highly supportive political constituency. China is in the market for various agriculture and energy products. There is an obvious small-bore deal to be had if both sides want to put an end to escalation.
The health of the global economy hangs in the balance, as does the fate of oil prices. In a sign of pessimism, oil speculators cut their positions in net-long bets in oil futures by 17 percent in the week ending on October 1.
Meanwhile, worrying economic data continues to mount. German factory orders fell yet again in August. Last week, the U.S. reported a steep drop in manufacturing activity. The September jobs report was not as bad as feared, but not good enough to dispel the notion that the American economy was heading for trouble. For its part, the U.S. Federal Reserve said that the American economy was in a “good place” even as risks are rising.
Topping it off, the Trump administration announced $7.5 billion in tariffs on a variety of European goods following the WTO decision that went in the U.S.’ favor. The amount is a small fraction of what is at stake between the U.S. and China, but more tariffs between the U.S. and Europe, especially if it leads to retaliation, is only negative for commodity markets.
By Nick Cunningham of Oilprice.com
