Why a delay to the US-China interim trade deal is the best possible outcome
- Neither Xi nor Trump has run out of cards to play to secure the best possible deal for his side, but each will be careful to avoid scuppering the negotiations. More time spent ironing out the details will be time well spent
We are now in the last month of 2019, and it looks like a deal remains distant due to many sticking points between the two biggest economies in the world.
If the Asia-Pacific Economic Corporation gathering had taken place as scheduled on November 16-17 and presidents Donald Trump and Xi Jinping had failed to sign a deal, the markets would have been deeply disappointed.
The best guess is that China and the US will agree to postpone additional US tariffs, due to take effect from December 15, to give more time to the negotiations, which would indicate that the signing of phase one is likely to be delayed to at least the first quarter of 2020.
Why have the trade talks become a marathon? Let’s look at some of the sticking points.
Clearly, China wants an “equal” agreement and is pushing hard for it, probably in the expectation that Trump needs a deal desperately to help with his run in the 2020 presidential election. On its part, however, the US believes it has the upper hand. Put simply, neither side seems to have run out of options. In this case, a deal can’t be easily reached.
Given this backdrop, it is hard to expect a phase-one deal to materialise any time soon.
However, it seems neither side wants to rock the boat for now. Trump would probably want to keep the hope of a deal alive to sustain the stock rally. For Xi, some degree of a “fightback” might be necessary to showcase China’s power, keeping in mind that a blow-up would be damaging for the economy.
Hence, the best case for both China and the US is to let the talks continue and wait for the next decisive factor. So the phase-one interim deal has become yet another Waiting for Godot drama. To some extent, this might not be bad news for the markets. Both sides will have more time to polish the final details, which would make the deal – if and when it is reached – more implementable.
In addition, we all know that a phase-two deal resolving the major issues of contention looks almost impossible. If a phase-one deal were reached this year as the markets had expected, phase-two negotiations would have to start early next year, and this could quickly lead to a big disappointment that might eventually even unravel the phase-one deal.
All in all, the recent developments just reflect how dynamic the US-China relationship is.
Despite the constant back-and-forths in the trade talks, however, the big picture remains clear. To be blunt, everyone knows that the US-China conflict goes far beyond disagreements on trade. At the end of the day, this is a competition for power between China and the US, and it will last a very long time.
Hao Zhou is senior emerging markets economist at Commerzbank