China: Signs of goodwill and interim deal now in play

Trump delays tariff hike in a 'gesture of goodwill'

The main news this week was US President Donald Trump's decision to delay a tariff hike. In a tweet Wednesday night Trump wrote that 'At the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th anniversary on October 1st, we have agreed as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%) from October 1st to October 15th'. The day before China had exempted 16 US goods from tariffs, although it was only a very small part worth USD1.6bn out of a total of around USD110bn. In addition, the exemptions did not include the goods where China has the most political leverage on Trump: agricultural goods and autos. 

On Thursday, Bloomberg reported that Trump advisers were considering a so-called interim deal with China that would delay and even roll back some tariffs in exchange for Chinese purchases of agricultural products and commitments on intellectual property rights. Last night Trump said about an interim deal, 'It's something we would consider'.

Comment. How should we interpret the new initiatives? I think China has made it clear that if the US carried out the tariff increase on the 70-year anniversary of the PRC, it would be very difficult to make any progress in October. Moreover, by exempting some US goods for tariffs it made it easier for Trump to postpone the tariff increase without losing face. 

While it is positive that the two sides both show the will to create good conditions for the trade talks in October, it does not change the fact that some big hurdles remain, which is why there has been no progress since the break-down in early May. China is not likely to change its 'red lines', which includes a demand that tariffs are rolled back to the starting point and a refusal to make changes to its laws as part of the deal. These are key demands on the US side, as the White House wants a strong enforcement mechanism.

However, the fact that there is willingness on both sides to make a deal makes it a close call . An interim deal seems to be a possibility now, although we do not know how China will respond to this. Our baseline is still no deal before the election with a 60% probability, but it does leave a 40% probability of a deal. As we get closer to the US election, Trump could decide to make the necessary compromises to close a deal that includes big Chinese purchases of agricultural goods benefitting voters in swing states of Ohio, Wisconsin and Wisconsin and a big tariff decline on autos, which would give him some tailwind in Michigan, another swing state. 

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