Why a delay to the US-China interim trade deal is the best possible outcome

While the cancellation of the Apec summit in Chile last month was a disappointment, it was not completely bad news for the market as it actually gives China and the US more time and leeway to conclude their so-called “phase one” trade deal. We are now in the last month of 2019, and it looks like a deal remains distant due to many sticking points between the two biggest economies in the world. If the Asia-Pacific Economic Corporation gathering had taken place as scheduled on November 16-17 and presidents Donald Trump and Xi Jinping had failed to sign a deal, the markets would have been deeply disappointed. We might even have seen a repeat of the massive sell-off last December. With the Chile summit cancelled due to domestic chaos, there is now no clear timeline for both sides to reach an agreement. The best guess is that China and the US will agree to postpone additional US tariffs, due to take effect from December 15, to give more time to the negotiations, which would indicate that the signing of phase one is likely to be delayed to at least the first quarter of 2020. Why have the trade talks become a marathon? Let’s look at some of the sticking points. At the end of the day, this is a competition for power between China and the US, and it will last a very long time On its part, China insists that a deal should involve some tariff rollback; however, the US will only agree to delay imposing more punitive tariffs, and is reluctant to dial back existing ones. Meanwhile, the US wants China to make specific commitments on farm goods purchases, as this is critical for Trump to deliver his campaign promises. Nonetheless, China is reluctant to agree on a specific amount as it thinks this would be too big a concession. Xi broke his silence recently on the trade talks, saying Beijing wants to work towards a deal with the US but is not afraid to “fight back” to protect its own interests. “We want to work for a phase-one agreement on the basis of mutual respect and equality,” he said. Yet, a few hours later, Trump said in an interview: “I told President Xi this can’t be like an even deal because we’re starting off from the floor and you’re already at the ceiling so we have to have a much better deal.” Clearly, China wants an “equal” agreement and is pushing hard for it, probably in the expectation that Trump needs a deal desperately to help with his run in the 2020 presidential election. On its part, however, the US believes it has the upper hand. Put simply, neither side seems to have run out of options. In this case, a deal can’t be easily reached. Trump’s signing of the Hong Kong Human Rights and Democracy Act has created another obstacle for the already struggling negotiation process. As Trump himself acknowledged, the new law “doesn’t make [US efforts to secure a trade deal] better”. What to expect from the 2020 US elections: more disunity, no love for China In retaliation, the Chinese government has said it will deny port visits of US military vessels and aircraft to Hong Kong and sanction some US non-profit organisations, and further threatened to impose visa restrictions on US officials. Given this backdrop, it is hard to expect a phase-one deal to materialise any time soon. However, it seems neither side wants to rock the boat for now. Trump would probably want to keep the hope of a deal alive to sustain the stock rally. For Xi, some degree of a “fightback” might be necessary to showcase China’s power, keeping in mind that a blow-up would be damaging for the economy. Hence, the best case for both China and the US is to let the talks continue and wait for the next decisive factor. So the phase-one interim deal has become yet another Waiting for Godot drama. To some extent, this might not be bad news for the markets. Both sides will have more time to polish the final details, which would make the deal – if and when it is reached – more implementable. In addition, we all know that a phase-two deal resolving the major issues of contention looks almost impossible. If a phase-one deal were reached this year as the markets had expected, phase-two negotiations would have to start early next year, and this could quickly lead to a big disappointment that might eventually even unravel the phase-one deal. If trade war deal is near, will the future for US and China be any better? All in all, the recent developments just reflect how dynamic the US-China relationship is. Despite the constant back-and-forths in the trade talks, however, the big picture remains clear. To be blunt, everyone knows that the US-China conflict goes far beyond disagreements on trade. At the end of the day, this is a competition for power between China and the US, and it will last a very long time. Hao Zhou is senior emerging markets economist at Commerzbank

Why a delay to the US-China interim trade deal is the best possible outcome

Neither Xi nor Trump has run out of cards to play to secure the best possible deal for his side, but each will be careful to avoid scuppering the negotiations. More time spent ironing out the details will be time well spent