U.S. – China Trade War Update

The recurring drama of U.S.-China trade relations reached a temporary truce this weekend, albeit with the promise of additional acts to come in jU.S.t three months. Still, we welcome the respite, as ratcheting down threats of a trade war is better than ratcheting up. But what exactly has been happening? And what has been agreed to?

The U.S. has imposed 10% tariffs on $200 billion of Chinese goods. The U.S. had threatened to raise these tariffs to 25% on January 1st 2019. After a dinner between President Xi and President Trump at the G20 meeting in Buenos Aires, both sides agreed that the tariff increase would be postponed for 90 days. There’s also a great deal of cross talk that lends confusion as to exactly what was agreed to. To wit:

• The U.S. statement mentions a 90 day deadline for further negotiations before tariffs are raised to 25%. The Chinese statement does not mention this¹. Trump’s economic adviser Larry Kudlow then said that the 90 days doesn’t start until January 1st 2019. A later White House statement contradicted Kudlow, declaring December 1st 2018 as the start date².
• The U.S. statement says that the U.S. and China will negotiate immediately on forced technology transfer and intellectual property protection, whereas the Chinese statement merely claims that the U.S. and China will work together to reach consensus on trade issues.
• The U.S. statement claims that China will purchase very substantial farm, energy, industrial, and other products, whereas the Chinese statement only says that China will import more U.S. goods. 
• The Chinese statement said that the U.S. and China agreed to boost market access, but the U.S. statement does not mention this.

As you can tell, it isn’t all that clear what the two sides agreed on, other than to kick the tariffs can down the calendar a few more months. And to further muddy the waters, Trump has swapped his lead negotiator, replacing Steven Mnuchin, who has been dovish on China and eager to avoid a trade war, with Robert Lighthizer, a hardliner known for urging punitive tariffs for China³.

One potential step forward is China’s announcement of additional punishments for intellectual property theft. Whether this is a major breakthrough in negotiations or mere window dressing remains to be seen, but some degree of progress is better than no progress, which itself is better than a trade war⁴.

All in all, we, and the markets, are glad to see a truce as evidenced by market activity on December 3rd 2018, the first trading day following the announcement. It does seem like specific progress is limited at the moment, which makes it all the more likely that we will be revisiting this topic and providing ongoing updates as talks unfold. At this time, we remain cautiously optimistic that the U.S. and China will find it in their best interests to negotiate a trade deal rather than escalate a trade war.

— JMS Team

Sources:

¹There is a fantastic summary by Bloomberg of differences between the U.S. and Chinese statements, found here: https://www.bloomberg.com/news/articles/2018-12-02/u-s-china-trade-truce-side-by-side-comparison-of-statements

² See https://www.axios.com/larry-kudlow-U.S.-china-trade-war-truce-start-date-eb671912-0064-4477-aee1-53ca46577fc5.html

³See https://www.nytimes.com/2018/12/03/U.S./politics/trump-china-trade-war.html

⁴See https://www.bloomberg.com/news/articles/2018-12-04/china-announces-new-punishments-for-intellectual-property-theft