Get Ready for the Blow Up in Trade Talks

Get Ready for the Blow Up in Trade Talks

The US-China trade war started in January 2018 with Trump’s announcement of tariffs on solar panels and appliances that applied broadly, but were mostly aimed at China.

It escalated quickly from there, with China announcing retaliatory tariffs and Trump doubling down with more tariffs on Chinese steel and electronics.

China escalated again — and the two parties were almost at the point of 25% tariffs on 100% of all goods traded between the two countries — before a ‘truce’ was declared in early December to allow time for negotiations.

The truce expires on 1 March.

How are those tariffs working out? Not too well for China

Many observers assumed the trade war would lead immediately to a drastic reduction of US-China trade and a reduction in the US trade deficit with China. Neither of those events happened.

China’s trade surplus with the US actually reached a new record in 2018 of US$323 billion; a 17% increase in the surplus compared with 2017.

Many analysts interpreted the data to mean that Trump’s trade war is a failure and China will ‘win’ the war.

That’s not correct.

The China trade surplus represents US importers trying to buy as much as they could from China before the tariffs were put in place.

It takes about six months from the time tariffs are announced to when they apply.

Since tariffs were announced between January and June, US importers have been busy loading up on inventory in the second and third quarters of 2018 to ‘beat’ the tariff hikes.

That explains the surplus. What happens next will be more interesting.

With US businesses loaded up on Chinese inventory, US growth slowing and tariffs finally taking hold, China’s exports to the US could fall off a cliff in early 2019.

Don’t believe the trade war happy talk going on right now.

This trade war is about to get much worse.

Don’t believe the happy talk on US trade negotiations with China

The US was set to activate a new wave of steep tariffs on imports from China on 1 January 2019.

Those tariffs would have provoked more retaliation from China, although China’s scope was limited because it was running out of US imports to apply tariffs to, since China buys far less from the US than the US buys from China.

In early December, US President Trump and Chinese President Xi reached a 90-day ‘truce’ whereby they agreed to hold off on new tariffs until 1 March 2019, to give time for both sides to negotiate the most contentious issues and arrive at a mutually satisfactory agreement that would end the trade war.

Not much happened in December, although China indicated it would roll back some of its 2018 tariffs and buy more soybeans from the US.

This did not represent real progress, since it only restored the status quo and did nothing to solve the more contentious issues of theft of intellectual property and limitations on direct foreign investment.

Since 1 January, the White House has issued a series of upbeat statements suggesting the trade talks were going well and a positive outcome might be within reach.

The Chinese echoed these views.

Markets responded positively to the prospect of the trade wars winding down.

Not so fast!

US Trade Representative Robert Lighthizer told Congress that very little progress has been made on the tough issues of intellectual property and investment restrictions.

China is unlikely to concede much on these issues because it relies on stolen technology to make its own industries globally competitive.

Trump is unlikely to reach an agreement that does not offer protections in these areas that are substantive and verifiable.

It’s possible that the 90-day truce will be extended if some progress is made in the next six weeks.

But it’s also possible that the US will end the truce and raise tariffs as originally planned in order to force China’s hand.

Markets are not ready for a blow-up in these trade talks.

We will have more insight on the outcome at the end of this week.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia