Is the end to the trade war near for China and the US?
Although both sides are reportedly aiming to wrap up a deal by the end of April (a timeline to be taken with a pinch of salt - see scenario analysis below), the trade war remains in a state of purgatory for now. Punitive tit-for-tat tariffs imposed by both sides across 2018 remain in place. But President Trump avoided escalating the dispute any further by indefinitely postponing a slated tariff hike on 1 March, which has provided both sides with additional time to get a deal over the line.
Will a deal be reached?
The fact that President Trump – the chief architect of the current China policy – appears keen to strike a deal suggests that an end to the trade war is on the horizon, even if the road towards this destination remains full of potential potholes. The final contours of any deal and what concessions China might offer up remains uncertain, but the latter will almost certainly fall short of the sweeping structural changes that hawks in Washington and the foreign business community in China would like.
Beijing has consistently signalled its willingness to take steps to rein in the bilateral trade deficit and measures in pursuit of this objective are highly likely to be included in any deal. This would entail Beijing directing Chinese buyers to resume and ramp-up purchases of US crude oil, LNG, coal and agricultural commodities once the ink is dry.
American commodity exporters to benefit from the deal
Such a command would prove a boon to American companies in a position to meet this politically-stoked demand, although the potential for geopolitical tensions to (once again) disrupt the bilateral resource trade down the line will cast a long shadow. Beijing will also be wary of becoming overly reliant on a strategic competitor for its commodity imports – in the same way that the US is concerned about its dependence on critical commodities sourced from China – suggesting that there will be a ceiling to the bilateral resource trade.
What are the implications for Australia?
Where there are winners there are of course losers. For example, Beijing’s cajolement of Chinese steelmakers towards US met coal would likely come at the expense of Australian exporters’ market share of the steel feedstock, compounding concerns about ongoing restrictions on landing Australian coal into China. Similarly, Australia’s position as China’s largest source of LNG would likely be eroded if Beijing were to make its preference for US LNG imports clear to its national oil companies.
China’s economy is feeling the heat
Clinching a trade deal would also relieve pressure on the world’s second-largest economy, have positive commodity demand implications and thus see miners the world over breathe a sigh of relief. China has begun implementing targeted stimulus measures announced at the ‘two sessions’ in early March, which aim to prevent the economy from slowing too rapidly in a year littered with politically sensitive anniversaries.
How will proceedings play out?
Our current thinking as to how proceedings will play out is outlined below. But we will be closely monitoring the statements of the key protagonists involved in the negotiations (including President Trump’s Twitter feed) for signs that the two sides are moving closer to a deal and for clues as to what any final agreement might look like.
Presidents Xi and Trump will likely meet to sign off on any agreement that their representatives are able to reach. But the Hanoi debacle – where the US leader walked away from a meeting with North Korea’s Kim Jong-un without sealing a heavily signposted agreement – means that China’s leader is extremely cautious about meeting with Trump without a deal first being firmly locked down, to avoid any chance of losing face on the international stage.
Will the US and China reach a trade deal by 1 May 2019?
Scenario one: No deal
The two sides are unable to wrap up a trade deal by the end of April and President Trump follows through on his previous threat to increase tariff rates on USD200 billion worth of goods from 10% to 25%. China almost certainly reciprocates through a combination of tariff increases and non-tariff measures. The trade war kicks up another gear and rumbles on for the foreseeable future.
Scenario two: Keep talking
The two sides fail to reach a deal by the end of April 2019, but President Trump once again agrees to extend the ‘truce’ period, either because he feels a deal is within reach or out of concern for the impact a further tariff hike will have on financial markets and the wider US economy. Existing tariffs remain in place, but an escalation is averted, at least temporarily.
Scenario three: Soft deal
President Trump’s inclination to seal a deal outweighs efforts by Lighthizer et al. to cajole the Chinese into overhauling its state-capitalist economic model. As well as committing to reduce the bilateral trade deficit, Beijing gives enough ground on providing greater market access, clamping down on forced technology transfers and strengthening intellectual property rights to satisfy Trump. The deal dials down trade tensions but likely proves only a sticking plaster in a relationship that looks set to be characterised by strategic competition.
Scenario four: Tremendous deal
In the face of an accelerating economic slowdown on the home front, Beijing agrees to an ‘enforceable deal’ along the lines of what Trump’s China hawks are shooting for, which includes sweeping structural reform to China’s state-capitalist economic model and a unilateral right for the US to implement tariffs if it perceives Beijing to be non-compliant. Bilateral trade tensions subside as a result, although wider strategic and security concerns continue to complicate bilateral relations.