A US-China trade deal may end the battle, but it won’t end the ‘economic cold war’

US Army Colonel David Anders, with Chinese leader Xi Jinpoing. (Photo by Alex Wong / Getty Images)
  • Deutsche Bank’s China-based analysts think the probability of a US-China trade deal has increased to 50%.
  • However, any trade deal will only mark the end of a battle, not the ongoing “economic cold war”.
  • They pointed to last month’s provocative speech by US vice-president Mike Pence as evidence of America’s entrenched anti-China stance.

Analysts at Deutsche Bank think the odds of a US-China trade deal have improved, with possible concessions from both sides now in play.

Asian markets surged on Friday afternoon and the AUD got a sharp boost, after media reports indicated US President Trump had issued instructions to draft a trade deal.

But gains in the Aussie were tempered on Friday night after Larry Kudlow, Trump’s chief economic advisor, said a trade deal wasn’t in the works yet.

And some analysts speculated that it was a political ploy by Trump ahead of Tuesday’s mid-term elections.

In the wash-up, Zhiwei Zhang and Yi Xioing from Deutsche reckon the probability of a trade deal has been upgraded to a coin-flip.

They now see a 50% of a deal being struck in the wake of last week’s developments.

However, “one important issue to highlight is that a trade deal may end a battle, but it does not mean the end of the economic cold war,” the pair said.

For evidence, they cited the no-holds-barred speech from US Vice-President Mike Pence in early October, who directly accused China of meddling in US affairs and stealing intellectual property.

Even if a deal was reached, the broader message behind Pence’s speech will “still haunt bilateral relations”.

“The strong bipartisan consensus in Washington DC against China is unlikely to change,” they said.

For now though, Zhang and Xioing think negotiations will resume ahead of a planned meeting between Trump and Chinese leader Xi Jinping at the G20 summit on November 29.

So, in the event that negotiations do advance, how would a possible trade deal look?

“It would likely include a promise from China to buy a large amount of US goods such as agricultural products and airplanes,” they said.

In addition, China would take measures to further open its service sector to US companies and lower tariffs for primary US export sectors such as the car industry.

And as part of any deal, the US would likely request that China take measures to fixed the renminbi’s (RMB) trading range at a stronger level against the USD.

“If the US persists on the RMB issue, China would likely follow the request and let the RMB appreciate somewhat.”

China’s currency rattled markets at the end of October when it fell to the lowest level against the US dollar since May 2008.

But in terms of intellectual property theft — the basis upon which Trump launched the initial round of tariffs — the analysts were a little more vague.

“There would likely be some promise from China to improve protection in terms of intellectual property,” they said.