US compromise raises chances of a real trade deal

• A 'phase one' US-China trade deal is on the cards by mid-November. Trump has shown willingness to compromise and we raise the probability of a bigger deal ahead of the 2020 election to 50% (from 40% previously).

• While trade tensions ease, the US-China fight continues in other areas.

• GDP growth hit a new low in Q3 but forward-looking indicators point to improvement ahead.

We now see 50-50 chance of real deal ahead of 2020 election

The sketch of a 'phase one' trade deal was hardly announced last week before doubts over what was actually agreed came to the surface. However, it seems to us that both sides want to at least get the 'phase one' agreement in place. According to Chinese state media Xinhua 'the two sides achieved substantial progress in areas including agriculture, intellectual property rights protection, exchange rate, financial services, expansion of trade cooperation, technology transfer and dispute settlement '. Taoran Notes, a state media blog on WeChat close to the government, struck a fairly positive tone on Sunday saying that China could easily buy 40-50 billion in agricultural products each year and that the US has shifted to an enforcement mechanism that is more palatable for China .

The deal is yet to be hammered out in a document set to be signed by US President Donald Trump and Chinese President Xi Jinping at the APEC summit in Chile in mid-November. China said Thursday it hopes to reach a phased trade deal with the US as soon as possible. The plan from here is to sign a 'phase-one' deal in mid-November and immediately move on to 'phase two'. Ministry of Commerce representative Gao Feng said that the two sides are in the process of consultation of the first phase agreement and have 'discussions on the work arrangements for the next phase '. The deadline for a 'phase-two' agreement may be mid-December when more US tariffs are set to go into effect.

Comment. As we have written in the past weeks, both sides now have an interest in de-escalating the trade war. For a long time Trump has felt he had the upper hand and could easily add tariffs on China. However, with the US economy weakening and manufacturing jobs being threatened (see chart 1), more tariffs on Chinese goods would be a shot in the foot. If Trump can land a 'phase-one' deal, he can secure substantial Chinese purchases of agricultural goods to ease the pain for important farm voters. A 'phase-two' deal would be much harder to agree on, though, as they regard China's 'red lines'. However, Trump could choose to make the necessary compromise to show that the 'ultimate deal maker' is actually able to make a big deal, which could give him a much needed boost to the economy and stock markets, which would increase chances of re-election in 2020.

We now see a 50-50 probability of an end of the trade war ahead of the US election , a change from our 60% probability of a no-deal scenario. We still expect plenty of bumps in the road, but Trump seems quite keen on making a bigger deal and he has apparently already compromised on the issue of 'enforcement'.

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