NO DEAL, BUT NO ESCALATION: Why CBA expects the US-China trade deadline will be extended

Mark Wilson/Getty ImagesTime is ticking.
  • The trade war between China and the US has now been underway for nearly a year.
  • An escalation in the conflict could occur should a trade deal between the two sides not be agreed by March 1.
  • The US has promised to broaden and increase tariffs on all Chinese imports entering the country should no deal be struck by the time the deadline lapses.
  • With negotiations between the two sides seemingly inching towards a deal, the Commonwealth Bank says the odds of this deadline being extended have increased.

Unless a trade deal can be struck by March 1, the US government says it will broaden and increase tariffs on all Chinese imports entering the country, escalating the trade war that’s now been underway for close to a year.

Such a scenario would be a dangerous and unwelcome development for the global economy, especially as there’s clear evidence that a slowdown in activity is already underway.

Kevin Xie, Fixed Income Quantitative Strategist at the Commonwealth Bank, says an escalation in the trade war is unlikely to take place, albeit with a very big caveat: China’s government will need to satisfy US officials that it will deliver on its promises.

“There are reasons to be tentatively optimistic about the prospects of a prolonged trade truce between the US and China,” Xie says.

“The Chinese government has already committed to purchasing a substantial amount of US agricultural and energy products. The Chinese government is also taking steps to address US claims on forced technology transfer, non-tariff market access barriers and intellectual property protection issues.”

These are all attempts to appease concerns raised by the US government, and have been cautiously welcomed by officials, including Donald Trump, but Xie says that an actual concrete trade deal between the two sides is unlikely to arrive before the hard deadline on the next round of US tariffs kicks-in at the start of March, meaning the odds of a continuation of the status quo are firming.

“In light of recent developments, we consider the current trade truce is likely to be extended beyond the current deadline. In our view, both sides will need more time to reach a compromise,” Xie says.

“However, trade negotiations are unlikely to be a smooth journey because the two sides remain divided on certain topics.”

In particular, Xie says China’s plan to become a global powerhouse in advanced manufacturing, known as the “Made in China 2025” plan, will be a major sticking point in negotiations between the two sides.

“The US is demanding the complete abandonment of the Chinese government’s ‘Made in China 2025’ (MIC) plan because it is perceived as a threat to the US’s technology position,” he says.

“China has downplayed the MIC plan but has not scrapped it.

“The statement following China’s annual Central Economic Work Conference stated upgrading manufacturing capability was a key policy initiative… [given it’s seen as a] means of escaping the ‘middle income trap’.”

With negotiations between China and the US seemingly inching towards a deal, and with concerns about a possible escalation in the trade conflict still lurking beneath the surface, raising the potential for renewed weakness in financial markets, Xie says a postponement of the March 1 deadline will not only allow for further time for negotiation but also for US officials to examine whether China is following through with promises already made.

“The US continues to demand structural changes from the Chinese government. However, in our view, there is a change in focus,” he says.

“The demand for ongoing monitoring and verification indicates the US is cautious whether the Chinese government can deliver on its promises.”

As things currently stand, the US has implemented tariffs of between 10% to 25% on $US250 billion worth of Chinese goods entering the country. In retaliation, China has introduced reciprocal tariffs on $US110 billion worth of US goods imports.

In December, the tit-for-tat tariff tiff between the two nations came home to roost in China’s trade report with the value of imports and exports both falling by the most in year-ended terms since the second half of 2016.

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