Bell Lap for US-China Trade Talks

Pundits continue to debate the latest rumors in US-China trade talks while under-addressing the fundamentals, which have not really changed. We stand by our deduction that the closer we get to a decision-point, the clearer it will be to Donald Trump that a deal can be a liability as easily as a boon to the economy. We identify four elements that need to be present in order for him to defend his deal, and so far they are not on track. He made this mismatch public March 20, when he said punitive tariffs must remain until Chinese concessions were manifest. Meanwhile, Washington and Beijing aren’t even negotiating on other areas where the relationship is already shrinking: direct investment, movement of people and exchange of ideas.

Bottom line: Optimism about trade negotiations coming to a tidy conclusion is misplaced. The likely outcomes are finite, and none is likely to sustain enthusiasm: an outright fail, a purportedly big deal that rings hollow, or a small deal that fails to justify all the bluster. Even a truly good deal, which is very unlikely given few signals about reform intentions, would leave ample room for national security hawks to chip away at the bilateral relationship, rightly or wrongly, and that is going to inject more risk onto balance sheets and loan books. These are the same possibilities we’ve had all along. What is changing is that observers, and perhaps Trump himself, are starting to recognize the “morning after” risk associated with a deal that lacks substance. In the medium term we see constructive scenarios, but for this year rising bilateral economic disruption is the most likely case.

Posted April 4, 2019
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