China: The Money Line

Published on December 13, 2019

Chinese officials have just confirmed that there has been enough progress on trade talks with the US that the Trump administration will, as widely expected, refrain from hiking a final round of tariffs on December 15 as previously threatened. And through all the confusion of the last 48 hours, the bottom line is that both sides continue to work towards finalizing the legal text of a Phase One deal, as Chinese sources suggested, perhaps by the advent of the Chinese Lunar New Year on January 25 (see SGH 12/5/19, “China: Status of US Trade Negotiations”).

** But for markets, the all-important dispute over when and how US tariffs will be rolled back in exchange for agricultural purchases from China appears to remain unresolved, which means a truce, but no significant rollback or rollback schedule yet, except for a limited cut in half of the September tariffs that markets were hoping for.

** Indeed, the “money line” take-away if any from the just concluded Chinese Commerce Ministry press conference is the following: “CHINA: COOPERATION SHOULD BE BASED ON MKT PRINCIPLES, WTO RULE.” This reference back to WTO principles is a pointed reiteration of Beijing’s insistence that WTO rules prohibit the explicit targeting and guarantees of agricultural purchases the US has been demanding from China (at the competitive disadvantage, ostensibly, of other exporters such as Brazil and Argentina).

** And this strong indication that Beijing is still, at this stage of negotiations, pushing back on explicit agricultural targets for each year explains to us why tariffs have not yet been rolled back more aggressively, and why there has been no confirmation on the other end of an actual schedule for agricultural purchases.

** WTO or no WTO, as a point of context, Chinese sources today also note, again, that the highest dollar volume ever of agricultural purchases from the US was in 2017, and that was for $24.12 billion — a far cry from the $50 billion number some outlets were bandying about for 2020, (a truly ridiculous concept), and the $50 billion level which President Trump has been so focused on hitting, albeit over the course of a few years, and which seems may be morphing more towards a $40-50 billion range.

** From Beijing’s side, while encouraging President Trump to take the deal at hand, from what we understand, as of today, China’s President Xi Jinping has yet had no direct contact with the US lead negotiators US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, since a phone call that we are told took place on November 26.

** Indeed, President Xi only made a brief mention of the US-China trade dispute in his just concluded comments to the Central Economic Work Conference, and that was to note that Sino-US trade frictions have become “the new normal.”

** With all this in mind, we believe the signing of a deal (and another truce) will in and of itself be a positive, but if we are right about this continued uncertainty on any additional tariff roll-backs, if they are to happen at all, it may in the end trump the deal, so to speak, in keeping a dampener on market, and business sentiment.

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