US-China: Rising optimism over trade talks – Danske Bank

Danske Bank analysts point out that this week provided further optimism that the trade war has peaked and a phase one deal is in the pipeline - a deal that could include a roll-back of some tariffs. 

Key Quotes

“China's spokesman from the Ministry of Commerce said on Thursday that 'in the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement'. Both sides agreed to reduce tariffs proportionately and at the same time in different tranches as sequential deals are struck.”

“China is pushing the US to cancel the tariff increase in December and remove the 15% tariff rate imposed on 1 September on Chinese goods worth USD125bn. According to Reuters China also aims for relief from 25% tariffs put on goods worth USD250bn. White House spokesperson Stephanie Grisham told Fox News on Thursday the US is "very, very optimistic" about completing a trade deal.”

“The timing of a phase one deal is uncertain and according to a US official it may stretch into December. The location is also not agreed upon and a dozen places have been aired ranging from Iowa, Alaska and Hawaii to London, Sweden and Switzerland. The signing spot may depend on when a deal is ready, as it could take place in connection with other travel by the two presidents of US and China.”

“A few things happening on the Chinese side should help soothe the atmosphere for the continued trade talks: this week nine Fentanyl smugglers were jailed in a landmark US-China cooperation. The crackdown on opioid shipping from China to the US was part of the first ceasefire deal made between Xi and Trump at the G20 meeting in December 2018. In August, however, Trump accused China of delaying action on this. Another positive thing happening was a Chinese removal of curbs on US poultry imports.”

“We look for a phase one deal to be signed in late November or early December and expect it to include a roll-back of the 1 September 15% tariff hike on USD125bn of goods. A deal will also include China buying more agricultural goods, which we suspect Trump is quite anxious to get started as US farmers are hurting badly from the trade war, and farmers are key in the political swing states Ohio, Iowa and Wisconsin.”

“It will still be a tough deal to make, though, and we should be prepared for potential set-backs on the way. China has some leverage due to the weakening US economy that will increasingly hurt Trump's re-election platform. On the other hand, China also wants a solution to the trade war in order to slow down the pace of companies that are leaving China for production in other countries. So the two sides should be able to land a phase one deal.”