Opportunity for easing China-US trade row shouldn’t be missed

By Shen Jianguang Source:Global Times Published: 2018/11/5 22:23:39

Illustration: Luo Xuan/GT

Chinese President Xi Jinping and US President Donald Trump on Thursday held a telephone conversation, according to the Xinhua News Agency. The conversation gave inspiration to the markets, with both US stocks and the offshore yuan rallying.

The conversation and a meeting between the two leaders during the upcoming G20 summit in Argentina could be a rare window of opportunity for the easing of China-US trade tensions. A comprehensive approach to seizing the opportunity is required to avoid China and the US falling into the so-called Thucydides Trap of a broad confrontation.

Pessimism still prevails as to the two countries preventing trade friction from escalating into a comprehensive trade conflict by the end of the year, which means the prevention of the US raising tariffs on $200 billion of Chinese goods from 10 percent to 25 percent.

But I would argue that high levels of pessimism often point to the severity of the situation and having low expectations often raises hopes for negotiations. It seems that the G20 meeting later this month might be a valuable window of opportunity to reduce the trade tensions before the end of the year.

That many people have little anticipation of easing China-US trade tensions arises from several reasons, including a deadlock between the two countries since the US announcement in late September that it would levy 10 percent tariffs on $200 billion of Chinese products. Growing trade demands made by the US that go beyond the economic sphere and into the diplomatic and political areas make the short-term rift between the two countries seemingly irreconcilable.

Also, the US government's attitude toward negotiating with China is a combination of carrots and sticks, making it hard to judge the US' policy limits and true intentions.

Given this situation, what is the possibility of avoiding a comprehensive trade conflict between China and the US? I'm not as pessimistic as are many in the markets. There is a chance that the two sides can grasp the crucial point when the leaders of the two countries meet, which is putting off an escalation of the trade friction into the levying of 25 percent tariffs on $200 billion of Chinese products.

Some signs are emerging of a proactive reconciliation, judging by the US economic performance and the two countries' policy orientation, among other factors.

It seems that although US President Donald Trump takes an aggressive attitude toward the trade dispute, the outcome is by no means a sure thing for the US.

Speaking of the financial markets, the US experienced a bruising rout in the stock and bond markets in October. Wild swings in the US financial markets revealed the panicked sentiment in investors resulting from the Fed's rate hikes and overvalued stocks, as well as uncertainties amid the trade row.

In terms of fundamentals, the US economy reaching a cyclical peak is a high possibility. The US economy beat expectations to grow at an annual rate of 3.5 percent in the third quarter, buoyed by improved corporate earnings and higher consumption spending as a result of rising incomes, both thanks to the tax overhaul. But as the benefits of the tax reform taper off next year, the negative impact of the trade friction will become more evident and the scope of US fiscal policy will increasingly narrow, potentially putting downward pressure on its economy.

In its World Economic Outlook released in October, the IMF cut its US growth forecast for 2019 to 2.5 percent, down 0.2 percentage point from its April estimate.

In addition, the trade row is likely to push up US inflation. Furniture and leather goods are among the $200 billion of Chinese products that Trump imposed tariffs on. Chinese products in these two categories account for more than half of the US imports. The levy would therefore inevitably put upward pressure on US domestic prices.

An upswing in inflation would force the US to tighten its monetary policy and continue raising interest rates. It's something that Trump doesn't want to see, as he has previously criticized the Fed's interest rate hikes. A rift in US domestic policy would also widen.

Furthermore, the cost impact of the trade friction on US businesses has become apparent. For Trump's part, he faces immense political pressure, both internal and external. If the US is to have a comprehensive confrontation with China, Trump may be overwhelmed by that situation.

China has already taken into consideration how to prevent the trade dispute from escalating, as such an outcome would have a profound impact on the Chinese economy. Over the short term, there is still certain room for US importers and retailers to make changes to their marketing strategies, and yuan weakness and higher export tax rebate rates would also ease much of the pressure on the Chinese economy.

In the long run, however, it is not that easy to find export markets that could sufficiently replace the US. As a consequence, the trade tensions would have profound repercussions on the outlook for investing in China, entrepreneurial confidence, and the entire supply chain. The longer the trade dispute lasts, the greater the risks will be.

There have actually been growing signs creating space for talks between the two leaders during the upcoming G20 meeting. Meanwhile, measures for further reform and opening-up of the Chinese economy are being implemented.

In light of the Trump administration's unclear policy, China ought to be ready to respond to the trade dispute. On the one hand, China needs to prepare for the worst and bolster investor confidence in the economic outlook. On the other, it's crucially important for the forthcoming meeting between the two leaders to ease the bilateral trade tensions.

The author is chief economist with JD Finance. bizopinion@globaltimes.com.cn

Newspaper headline: Opportunity for easing trade row shouldn’t be missed


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