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What will happen in this week’s trade talks?

As the US sends its top negotiators to Shanghai this week for trade talks, what is the likely outcome?

As the US sends its top negotiators to Shanghai this week for trade talks, what is the likely outcome?
Garry white employee

by
Garry White

in Features

29.07.2019

Steve Mnuchin and Robert Lighthizer are currently in Shanghai. The US treasury secretary and trade representative will hold the first high-level, face-to-face meetings with Chinese officials since trade talks collapsed in May. The news has supported equity markets, as hopes of a resolution build, but an announcement of significance is unlikely. However, there are some positive indicators to look out for to see if progress is being made over the next few months.

Talks broke down earlier this year with the US blaming China for renegading on earlier promises, with China blaming the US for being too demanding. The discussions are scheduled to last from Monday to Wednesday and are expected to focus on a broad-brush assessment of the situation and the challenges to be resolved, rather than the nitty-gritty. So, any announcement is likely to be an attempt to provide reassurance.

Donald Trump and Xi Jinping, the Chinese president, met on the side lines of last month’s G20 summit and declared a truce. However, there has only been phone contact between Washington and Beijing since then. Markets had hoped for a swift resolution to the dispute, which has dragged on for more than a year. However, Washington does not appear to be in too much of a rush. It is clear that China is being damaged more than the US economy. Earlier this week the International Monetary Fund (IMF) noted that the tariffs were adding to a range of issues impacting the country.

“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt,” it said. The longer the dispute lasts the better for some Washington hawks, as companies have started to make decisions to disinvest from China.

However, these companies are not building factories in the US. The main beneficiaries are other south-east Asian nations – especially Vietnam. Nintendo has already said it will move production of its hit Switch game console to the country and Apple is also exploring the possibility of moving production of its AirPods there. More than 50 multinational corporations have announced plans to move manufacturing out of China.

This trend is also seen from Qima, which inspects and audits supply chains for large companies. In a recent survey of more than 150 consumer product manufacturers, it found that 80% of US companies and 67% of European businesses wanted to lessen their reliance on China. As a result of the US-China trade war, in Turkey and Africa inspection and audit demands grew by 40pc, it found.

However, there are negative effects for the US too. Last week, US motorcycle brand Harley-Davidson cut its full-year guidance as retaliatory tariffs hit home. Management also said that it had “obtained regulatory approvals confirming that motorcycles shipped from the company’s Thailand operations to the EU would receive more favourable tariff treatment than if they were shipped from the US”. This highlights the risk to US jobs a protracted dispute would bring.

However, the most pressing issue for the Trump team is agriculture, as rural Americans are an important part of his political base and the trade war is providing significant pain in farming country. So, the US government confirmed this week that farmers hurt by the trade war will receive a minimum of $15 (£12) per acre under an aid package to be unveiled before the end of this week. It will cost the government about $16bn.

This means it is highly likely that there will be a Chinese commitment to buy farm products such as soya beans to please Washington and kinder words towards Huawei to appease Beijing. However, this will be a repeat of the situation seen at the G20 summit in Buenos Aires last December, when a similar commitment was made that remains largely unfulfilled.

Indeed, In May, the US supplied just 980,000 tons, out of total imports of 7.36m tons, while Brazil shipped more than 6m tons to the Asian country. Beijing will also want Washington to remove Huawei from its “entity list”, which restricts its ability to trade with US companies. This is unlikely in the short term.

Investors should therefore be quite cautious about any statement next week, however positive. It is only when the soya bean ships start sailing that we can be confident that real progress has been made. Until then, it’s just spin to please the markets.

A version of this article first appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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