As President Trump departs for Vietnam on Monday for his second summit with North Korean leader Kim Jong Un, back home markets are rejoicing, with the S&P futures finally back over 2800 following the president’s decision to postpone the March 1 tariff deadline – which would have seen tariffs on some $200 billion in Chinese goods to rise by 150%.
I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very……
— Donald J. Trump (@realDonaldTrump) February 24, 2019
….productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!
— Donald J. Trump (@realDonaldTrump) February 24, 2019
While the market has clearly communicated its view – namely, that postponing the deadline confirms the pervasive optimism that a deal will be reached when Trump and Xi meet next month – a roundup of analyst comments published by Bloomberg showed that the consensus has decidedly shifted toward expecting an amicable resolution to the US-China trade war, though some reservations about its long-term efficacy remain. Several analysts said they expect the US’s tariffs on China to be completely unwound. Everyone now expects a deal, because both the US and China are looking to “stabilize business sentiment” and quell growing worries about a prolonged slump in global economic growth.
Ultimately, delaying the deadline will give Trump more leverage over the Chinese, and might even inspire Beijing to extend its menu of concessions – possibly to include more assurances on IP and a relaxation of its requirements for foreign companies to enter into joint ventures with domestic firms if they want to access the Chinese market.
But ominously, the comments largely ignored the tensions between Trump and the China hawks, led by US Trade Rep Robert Lighthizer, who is still technically in charge of US negotiations.
Here’s a roundup of analyst reactions (text courtesy of BBG):
- Hua Changchun, Guotai Junan Securities Co.
The two nations will likely reach a deal on all aspects in late March and the tariffs will not rise from the current levels, but that doesn’t mean the conflict between them will be over. Tariff wars will be suspended and we’ll enter the ‘post-trade-war’ era, where the two nations will shift to championing companies, promoting advanced technologies and trying to increase control over global economic rules.
- Louis Kuijs, Oxford Economics
This is a positive sign but it’s clearly not the end of difficult negotiations, let alone of the underlying tension between the two countries. Amongst other things, it will be difficult to agree on language on the “verification and enforcement” insisted on by the U.S. but disliked by China. Underlying tensions on technology, China’s industrial policies and, more generally, the rise of China, are unlikely to subside any time soon. Nonetheless, the tariff suspension and, possibly, a more lasting agreement would be a positive for international trade and business in both countries, as well as the global economy more generally.
- Li Yishuang, China Securities
The extension of the tariff deadline shows that both sides have a strong will to reach an agreement. The focus is on how China is going to carry out its commitments, especially on government subsidies but there are also more granular issues. As long as both sides are willing to reach a deal, I think they eventually will overcome those obstacles and the probability of a final deal is good. A final deal will be reached after Xi and Trump meet, but on the enforcement of the deal, the two nations will still have some conflicts. This won’t be very smooth.
- Wang Huiyao, founder of the Center for China and Globalization
This is a good sign that both sides need a deal at this stage. This is good to stabilize business sentiment in both countries and around the world, and is also good for the stock market. It is also conducive for China’s reforms and opening up, and boosting China-U.S. cooperation.
- He Weiwen, former commerce ministry official
This shows that both sides share the will to continue the talks until a final deal, which will be decided by the meeting of Xi and Trump. The temporary no tariff increase creates a stable environment both for the talks and for markets. The ultimate results of the bilateral trade agreement should be the total scrapping of tariffs on $250 billion in Chinese goods, and subsequently on $110 billion of U.S. goods.
- Gene Ma, Institute of International Finance
Trump wants a deal, not a war. His time is also running short with the 2020 election on the horizon. Beijing has made a greater commitment to reduce the bilateral trade imbalance. Thus holding back on the additional tariffs in return for some further concessions is not a bad strategy. The question is what he can get at the end. I expect Beijing will offer a longer shopping list, no RMB devaluation, better intellectual property protections, and fewer forced joint ventures. Beijing may tone down “Made in China 2025” but I don’t think it can meaningfully scale back its industrial plans and support for SOEs.
- Jonathan Fenby, TSLombard
Trump has been leaning this way since the dinner in Buenos Aires, leading China to play for time — successfully. Xi and colleagues want to sideline the trade war while they deal with domestic economic challenges and try to pump up confidence. Now the question is whether the focus moves from tariffs to technology where China looks more vulnerable.
- Derek Scissors，chief economist, China Beige Book International
The tariff delay was essentially decided in early November. That’s when the President either lost his nerve due to stock market weakness or thought he could get important Chinese help on North Korea. Since then, the only important question has been whether the U.S. has agreed internally on a credible enforcement mechanism. It doesn’t appear that we have and, until we do, the talks are worthless.
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In summary, analysts expect that Trump will prevail over the China hawks in his administration and strike a deal, regardless of whether Beijing commitments to “structural reforms”, like scaling back China 2025, reducing IP theft/forced transfers, and agreeing on necessary enforcement mechanisms. But that doesn’t mean that Lighthizer & Co. will quietly step aside and allow Trump to squander the leverage he has achieved with his tariffs. And if stocks do rally to new highs in response to a deal being struck, could we see more of a “sell the news” reaction this time around once investors realize that there’s not much in the way of substance beneath the headlines?
via ZeroHedge News https://ift.tt/2U8nqEa Tyler Durden