The trade fight between the US and China 'will get worse' and Trump could 'hit back harder' if he doesn't get what he wants

  • President Donald Trump sent seven key advisers to China last week.
  • The round of talks shows “a gaping distance between the US and China,” experts say.
  • The distance makes further trade restrictions and a trade battle escalation more likely.
  • “In the short term, a lack of concessions from Chinese officials (at least publicly) may encourage President Trump to continue to hit China, or hit back harder, in the trade dispute,” one analyst said.

The group of Trump administration representatives, led by Treasury Secretary Steven Mnuchin, went to Beijing for two days of talks last week in an attempt to avoid an all-out trade war between the two countries.

But instead of diffusing tensions between the two countries, the meeting may have made things worse.

“For the financial markets, which would like some good news on trade, there was disappointment as the US delegation to China returned after getting an earful from Chinese officials,” said Greg Valliere, the chief global strategist at Horizon Investments. “The two sides had ‘frank discussions,’ the US said – diplomatic language that’s used when there’s an impasse.”

‘Gaping distance’

The US demands were extreme. The central request was for China to develop a plan to cut the US-China trade deficit by $US200 billion, or 60%, before the end of 2020. Along with requests to end tariffs and government support for Chinese firms, the US demands would require a massive overhaul of China’s economic system.

On the other hand, China’s demanded the US open its market to more Chinese firms and back down on security restrictions targeted at Chinese tech firms, like telecom ZTE.

“The reports following the US trade delegation to China could generously be described as ‘mixed,'” said Isaac Boltansky and Lukas Davaz, analysts at the research and trading firm Compass Point. “Even though tangible progress during this round of meetings was unlikely, the leaked demands from both sides show a gaping distance between the US and China.”

The US and China also came into conflict over the weekend when the Trump administration blasted China’s efforts to convince foreign airlines to not call Taiwan a country. China and Taiwan have been entangled in a decades-long fight over the mainland’s control of the island.

Chris Kreuger, an analyst at Cowen Washington Research Group, said relations are moving in the wrong direction and called recent actions “the opposite of forward motion.”

“Though nothing about this process has been linear, so a breakthrough is still possible – just not probable in our minds,” Kreuger said.

Trump xiGetty Images / Thomas Peter-Pool

‘A long slog’

Given the distance between the Chinese and US, most policy analysts expect the escalating trade battle to continue for the foreseeable future.

In the short term, Trump’s tariffs on $US50 billion worth of Chinese goods will go into effect by the end of May. And more tariffs could be on the horizon.

“Both sides will keep talking, but this looks like a long slog. Additional tariffs could be announced by both countries within the next week or two,” Valliere said.

Ed Mills, a public policy analyst at Raymond James, said the slow pace of negotiations raises the possibility that Trump will rely on bully tactics to try and get China on board with his demands.

“In the short term, a lack of concessions from Chinese officials (at least publicly) may encourage President Trump to continue to hit China, or hit back harder, in the trade dispute,” Mills said.

Trump has threatened to impose an addition set of tariffs on $US100 billion worth of Chinese goods and the administration is reportedly considering further trade actions including restrictions on Chinese firms investing in the US. Given the lack of progress in the negotiations and these additional actions are likely to make the situation more perilous.

Already, US firms are feeling the squeeze from higher costs, and additional tariffs could become a problem for the economy.

Given the economic squeeze, there’s still a strong likelihood that Trump cuts a deal with the Chinese. Boltansky and Davaz said that while the short-term outlook is grim, the two sides have too much to lose from an ongoing trade war to not reach some kind of deal.

“Our sense is that things will get worse before they get better, but our view remains that China and the U.S. will find a way to step back from the cliff,” they said. “As President Trump said in The Art of the Deal: ‘The worst of times often create the best opportunities to make good deals.'”

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