Economics

Trump-Xi trade truce: what next?

Quickview: The trade truce between the US and China is a positive outcome, but we expect hostilities to resume later next year.

3 December 2018

Keith Wade

Keith Wade

Chief Economist & Strategist

  • What happened: The US is to delay implementing a tariff increase to 25% (from 10%) on $200bn of goods. The increase was due to come into effect in January. China is to increase its imports from the US. 90 days of talks on structural issues are scheduled.
  • Asian markets rallied on the news: China’s CSI 300 index closed up 2.8% on Monday, while Hong Kong’s Hang Seng Index rose 2.8%.

This is a better-than-expected outcome which will hold back an escalation of the trade wars in the New Year. However, we remain sceptical on the prospects for a longer-term agreement on issues such as intellectual property rights and expect a resumption of hostilities later in the year.

It is possible that the deal reflects a weakened US president after the mid-term elections, who has become more aware of the damage tariffs can cause. Certainly, this action will reduce the immediate impact on inflation from higher tariffs in 2019 which in turn can help the Federal Reserve pause rates.

Business will also be relieved not to be facing a further escalation of import costs. Both are positive for an economy which we expect to lose momentum next year as fiscal stimulus fades.

The question is how long can the truce hold? Signs of future tension were immediately apparent in the two sides’ respective press conferences, with the US emphasising that 25% tariffs would be imposed if no agreement is reached after 90 days, while China talked of reducing existing tariffs.

The outcome of the talks is better than expected but the differences on intellectual property and the treatment of technology in China are likely to prove major obstacles to a lasting agreement. The trade hawks in the White House will continue to press their case, which is shared by the Trump base. Meanwhile it is hard to see President Xi Jinping abandoning China’s position on intellectual property.

So, although there’s a truce - a peace deal will have to wait.

 

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