US-China deal hopes rise — but big questions remain

US-China deal hopes rise — but big questions remain

FT subscribers can click here to receive FT Free Trade every day by email.The scent of a new trade truce between Washington and Beijing is in the air. In a dramatic reversal from the escalation in commercial hostilities that dominated August, top US and Chinese negotiators are preparing to gather in the US capital in early October to see if they can resolve some of their differences.Expectations for the gathering had been muted until it emerged last week that, as part of an interim deal in which Beijing would purchase additional farm products, the US might be willing to consider rolling back some of the newest tariffs it introduced on Chinese goods. This would be far from the sweeping peace agreement contemplated in May, covering thorny issues like intellectual property and technology transfer, and which acrimoniously fell apart.There are reasons why such a partial deal could be appealing for both sides. Although Donald Trump and Xi Jinping have been determined to avoid any perception that they have been first to back down in the trade war, there are signs that both have been worried that escalation could backfire politically and economically. Hence the search for an acceptable exit route from the conflict that could avoid further damage to the global economy, at least in the short term.1. What’s the scope?The basic framework of a limited deal would be a quid pro quo in which China would boost its farm purchases in exchange for tariff relief. But the size and range of agricultural goods to be bought by Beijing is far from clear, as is whether this could be expanded to include purchases of other US products. The US would at the very least agree not to press ahead with higher tariffs due to kick in by mid-October and mid-December, but might also consider removing new levies introduced this month. If the partial deal became more ambitious, it could include a chapter on intellectual property, but that seems like a high hurdle.2. What are the politics?After ratcheting up tension with Beijing in the past few months, it was logical to assume that the US president had settled on a tough strategy towards China to win re-election to the White House next year. But it’s not as simple as that, and some of his advisers are cautioning that an economic downturn triggered by the trade war would be a big risk to his campaign. A partial deal allows him to be flexible.3. What’s the lifespan?If a limited truce is reached, it might not last long. Optimists hope that whatever emerges from the early October talks could last through the election, but Mr Trump is unpredictable and could resume hostilities on the spur of the moment. Also, any pause is likely to be attacked by China hawks in Congress and by some national security officials. Meanwhile, business will worry that the uncertainty has not been removed — levies would still be in place on billions of dollars of Chinese products, and the toughest issues in the relationship with Beijing would be unresolved.Can the US and EU strike a deal over aircraft subsidies?
The Trump administration is gearing up to impose retaliatory tariffs on the EU after the World Trade Organization issued its final ruling on subsidies to Airbus, in a case that has lasted for as long as most trade experts can remember.It’s worth recalling that these would be perfectly legal remedies according to global trade rules, and are fundamentally different in nature compared with the unilateral tariffs imposed by Mr Trump on China, on foreign metal products, and to those threatened on automotive imports.It is still unclear whether the US will respect the amount of retaliation allowed by the WTO, expected to be between $5bn and $8bn, or shoot for a higher figure. The hope is that the US and the EU can avoid the levies by striking a deal on aircraft subsidies, which would also cover the expected retaliation by the EU against the US for its support of Boeing.But betting on a positive engagement between Washington and Brussels on trade these days is unlikely to be a winner.Chart choice
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