“Since the issues at stake are deep seated and go beyond trade, talks could continue for months, if not years.”

A temporary trade truce was agreed between US President Donald Trump and China’s President Xi Jinping at a dinner during the G20 meeting in Buenos Aires at the start of December. As part of this truce, the tariff rate on USD200 billion of Chinese imports will stay unchanged at 10% up to 1 March, instead of increasing to 25% as planned in January. 

Trump said he deferred the hike in tariffs due to firm commitments from China, including its agreement to increase imports from the US to reduce the bilateral trade deficit. But the threat of higher tariffs remains on the table after 1 March since the Trump administration sees them as a way to maintain pressure on China to discuss wide-ranging bilateral issues, including what the US sees as forced technology transfers to the benefit of China’s firms, weak intellectual property protection, numerous non-tariff barriers, cyber intrusion and cyber theft of US systems. 

So the trade truce remains fragile and, as we are already seeing, fraught with tension.

After Trump highlighted his “incredible deal” with Xi Jinping, his recent tweets have been more threatening, suggesting impatience about getting more immediate ‘deliverables’ from China. Trump, for example, has said it was either a “real deal” or “no deal”, in which case the US would charge “major” tariffs on Chinese products.There has also been an important changing of the guard in the US negotiating team. Most significantly, Trump has put US Trade Representative Robert Lighthizer in charge of the talks with China in place of Treasury Secretary Mnuchin. Lighthizer is widely seen as more hawkish on the US-China relationship than Mnuchin.

We are also concerned that US anxiety about China’s ‘Made in China 2025’ industrial policy could handicap the trade negotiations. After the Buenos Aires dinner, official statements from neither side made reference to ’Made in China 2025’ or the role of China’s state-owned enterprises in that policy, but these remain deep-seated concerns for the US and they may well reappear in US rhetoric. The recent news about the arrest of the chief financial officer of Huawei, the world’s second-largest producer of telecommunication equipment and arguably the most successful Chinese technology company, by Canadian law enforcement at the request of the US government, vividly illustrates such tensions and could add to uncertainties about trade negotiations.

Just as importantly, it is not yet clear what could assuage Trump ahead of the March deadline. A modest deal on US soyabean and oil imports to China may not be enough to appease Trump, in our view. Trump himself, known for in the negotiation tactics set out in his best-seller The Art of the Deal, has kept his cards close to his chest – in particular on what exactly he wants ahead the March deadline. There are already some divergence on tariffs on US auto imports, with China rejecting Trump’s claim it had accepted to lower them in Buenos Aires. And the fact there was no joint statement after the dinner may also be a hint at widespread dissonance.

Given the many dangers in the coming negotiations and the US side’s somewhat nebulous intentions, we remain of the view that the tariff rate on Chinese imports, now at 10%, could eventually go up to 25% at some point in 2019 as Trump’s impatience grows, even though we think both sides will keep negotiating. Since the issues at stake are deep seated and go beyond trade, talks could continue for months, if not years. From an equity standpoint, uncertainty remains high despite the cordial relations between Trump and Xi. The devil will be in the details, meaning market volatility may remain elevated in 2019.

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