“The somber outlook is accentuated by our updated house view [that] the US-China trade war is going to last indefinitely with the current tariffs in place, but without the imposition of any additional tariffs”, BofA’s Ajay Kapur wrote Monday, in the course of explaining why discerning a light at the end of the tunnel for slumping global PMIs is still a tenuous exercise. “We believe that despite the restart of US-China negotiations, a deal is unlikely in the next few months as incentives have been weakened given the Fed has been offsetting the economic and market shock of the trade war”, he went on to say.
That’s generally the mood among most observers when it comes to how things are likely to develop in the months ahead. Indeed, even Donald Trump seems to believe a protracted stalemate is the base case.
On Friday, during a free-wheeling discussion with reporters in the Oval Office, the president said Beijing might try to wait him out in hopes that he’ll lose the 2020 election. The way he described things made it sound as though the White House has inside information that leads the administration to believe Xi isn’t in a hurry to strike a comprehensive deal.
Trade talks between the US and China will resume in Shanghai this week, and, as noted, expectations are understandably muted. Beijing has ratcheted up the rhetoric on some fronts (e.g., further accusations against FedEx) while toning things down on others (the nationalist drumbeat has dissipated a bit, and, as Reuters reports citing Chinese state media, “the US has shipped several million tonnes of soybeans to China since the two countries’ leaders met in June”). Still, Chinese imports of US soybeans in H1 totaled around 6 million tons, which looks like the lowest for any first half going back to 2005.
If you ask Barclays, it’s reasonable to maintain a “cautiously optimistic” view about the prospects for a less ambitious deal between the Trump administration and Beijing.
In a note out over the weekend, the bank posits a “more narrow agreement that addresses important trade-related issues, such as US demands to increase exports as well as increased market access in China” while Beijing asks Trump to “lift many of the restrictions against Huawei [and] exempt more Chinese goods from tariffs or even remove them altogether”.
Below is a table that documents the bank’s “three potential paths”: ceasefire (standoff), escalation, or a deal (de-escalation).
(Barclays)
Despite the decent chances of the two sides coming together to strike some manner of interim deal that deescalates things further and helps lift some of the uncertainty currently clouding the outlook for the global economy, the odds of a “real” agreement seem remote.
“We remain skeptical about the prospects of a broader agreement that includes the more challenging security-related issues, including verification processes, enforcement provisions, and how to prevent alleged IP theft and the forced transfer of technology”, Barclays goes on to warn, in the same Sunday note.
The bank also highlights the fact that Congress is now pressing hard to enshrine the Huawei restrictions into law just as the administration seeks to roll them back.
“While the White House has a fairly wide latitude to operate when it comes to trade authority, the ability of the White House to grant waivers for firms selling to Huawei may become more limited by Congress”, Barclays cautions, adding that “given the rise of Huawei and the importance of 5G, US policymakers, defense officials, and the intelligence community are becoming increasingly opposed to Huawei as they point to national security concerns”.
And that’s hardly the end of it. As we’ve written here previously, the Trump administration has seemingly backed themselves into a corner when it comes to insisting upon the “national security” narrative. Now that Trump has opened that Pandora’s box, lawmakers do not appear receptive to seeing it closed.
“They often reference the threat of espionage and cyberattacks on physical telecommunications equipment and related software, the ability to steal sensitive IP, and the long-term economic and military benefits that accrue to the country that defines the global standards”, Barclays writes of congressmen/women and security officials who prefer the president stick to a hardline on Huawei and China’s global tech ambitions. “Data collection — both encrypted and non-encrypted — is also a concern, as officials argue that a breakthrough in quantum computing may allow governments to break current encryptions”, the bank continues.
Read more: Trump Goes After China’s Super-Computing Capabilities
In any event, the best anyone can hope for from this week’s talks in Shanghai is for the two sides to agree to keep talking. Assuming there are further rounds of negotiations, they will play out against a challenging schedule, as the US needs to make some progress with the EU and Congress reviews the USMCA.
At the same time, the 2020 campaign will kick into high gear.
It feels price and time dependent. The lower the indicies, the higher the pressure on both sides to make an optical deal. The closer to the election, the higher the pressure on one side, and the lower the pressure on the other side, to make an optical deal.