Here's what no trade deal could mean for the US and China

(Thomas Peter-Pool / Getty Images)
  • The US and China appear to be far from a breakthrough on trade negotiations.
  • Both economies have seen a series of dismal data in recent weeks.
  • Experts say further escalations, which are set to take place in March, would have far-reaching consequences for the global economy.

With just over a month before planned escalations in a trade war between the US and China, negotiations seem to be on thin ice.

“There’s been a lot of anticipatory work done but we’re miles and miles from getting a resolution, and frankly that shouldn’t be too surprising,” Commerce Secretary Wilbur Ross said in an interview that aired Thursday on CNBC.

So, what if a deal isn’t reached? A flurry of new risks have emerged in the world’s largest economies since hundreds of billions of dollars worth of tariffs were levied last year.

In China, weaker than expected data in recent months has compounded fears the economy could be headed for a hard landing.

From factory activity to consumer spending, key measures of business conditions have declined sharply as protectionism adds to a state-led deleveraging campaign. On Monday, the Chinese government said gross domestic product grew at its slowest pace in 28 years in 2018.

A prolonged trade dispute would only exacerbate the slowdown, which experts suspect is even worse than officials have led on. It could also lead the government to tighten its grip on the economy, according to Xingdong Chen, chief economist at BNP Paribas in Beijing.

“More control may be structurally a good thing to maintain stability,” he said. “But for the longer term, it would be pretty bad. China needs a more marketized economy.”

Trump has painted China’s slowdown as leverage in trade negotiations. The US, however, faces its own slew of risks in the case of no deal.

Screen Shot 2019 01 24 at 10.00.23 AMTwitter

Growth is already expected to slow in coming months, with more than half of economists recently surveyed by The Wall Street Journal seeing the US entering a recession by 2020. And with the longest partial government shutdown on record in its fifth week and counting, those odds are seen as rising.

Tariffs have taken a toll on businesses from both sides of the dispute, reeling from higher costs and uncertainty. While dimming its growth outlook this week, the International Monetary Fund warned unresolved trade tensions could further destabilize the already slowing global economy.

But Trump administration officials have become increasingly pessimistic that Beijing will budge on what have long been sticking points for Washington, the New York Times reports. Those include rules on intellectual-property theft and state support for high-tech and industrial companies.

Derek Scissors, a China expert at the conservative-leaning American Enterprise Institute, sees a 25% chance that negotiations are headed for a dead end. But any trade agreement that is reached would all but sure be temporary, he said.

“Unstable odds but the president right now prefers a deal,” he said. “The chance that a deal will be substantive and lasting are almost zero, because China will not stop acquiring IP by whatever means necessary and protecting SOEs from competition.”

High-level trade delegations from each country are scheduled to meet next Wednesday and Thursday as they attempt to reach a deal ahead of a March 2 deadline, after which tariff rates on $US200 billion worth of Chinese products are set to double.

“The runway is clear for this escalation, and if the two sides stick to their current views (China says forced tech transfer is not happening, the US says it is happening), we will see costs rise for US-based businesses and more bad news for the global economy,” Mary Lovely, an expert on trade at the Peterson Institute for International Economics, said in an email.

Now Read:

A $US2 trillion strategist unravels why a ‘pain trade’ that crushed investors over the past year is perfectly primed for a comeback

‘World power is shifting’: A self-made Lebanese billionaire explains why all the best business opportunities are in the East, even as the trade war rages

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.