- The US-China trade war has paused for the time being as the two countries restart trade talks.
- The lack of a fixed timeline for the trade talks continues to keep companies on their toes.
US-China trade talks resume
The presidents of the US and China met at the G20 Summit on June 28 and agreed to restart trade negotiations. To show openness to negotiations, US President Donald Trump stalled plans to impose a 25% tariff on $300 billion worth of Chinese imports. He also agreed to ease the Huawei ban by allowing US companies to supply goods and services that don’t pose a threat to national security.
In return, Chinese President Xi Jinping agreed to stall plans for new tariffs on US goods. He even agreed to buy more US goods to reduce the trade imbalance. While no new tariffs will be levied, the existing tariffs will remain. This scenario means that the trade talks will do little to address the slowing economy.
The two countries are coming to the negotiation table for the second time. The last time they stalled their tariff plans was after the presidents met in Buenos Aires in December 2018. However, the war resumed in May as the two parties encountered a conflict of interest. The US banned Huawei, increased tariffs on $200 billion worth of Chinese imports, and threatened to expand tariffs to the remaining $300 billion in Chinese imports.
Chinese imports rose year-over-year in the first quarter as US companies front-loaded purchases in anticipation of an increase in tariffs. US Census Bureau data showed that the overall US trade deficit in May rose 8.4% from the previous month. The country’s deficit with China increased 12.2% as US companies made purchases ahead of the Huawei ban.
Investors should focus on how trade talks progress
What’s important for investors is not that trade talks have resumed but how they will proceed. Although the two presidents agreed to restart the talks, they didn’t provide any timeline or clarity on the sticking points that broke down talks in the first place. This ambiguity around trade negotiations has convinced analysts that the trade war is here for the long term.
So what are these sticking points? The whole China trade war began because the US wanted China to stop stealing US intellectual property, lower the trade imbalance, reduce government subsidies to local companies, and increase market access for US companies. This called for major policy changes for the Chinese. The two parties were close to reaching a trade deal, but it fell through in May because of these three major sticking points.
Sticking points in US-China trade talks
The first sticking point was tariffs. China wanted the US to remove all tariffs on Chinese exports, but the US insisted on keeping some tariffs to enforce a trade deal. The second sticking point was the last-minute additions the US made to the trade terms. China stated that a trade deal must be based on equality and mutual respect.
The third sticking point was the restrictions on the goods China could buy from the US. China agreed to import more US goods, but the US imposed a ban on Huawei. Because China largely imports semiconductors and components from the US, it was left with limited goods to import. China stated that it would agree on a trade deal if the goods it purchased from the US were in line with its real demand.
At the G20 Summit, the two presidents addressed the third point. The US eased the Huawei ban, and China agreed to buy more agricultural products. However, there’s been no update on how these actions will be implemented. China hasn’t shown any signs of significant purchases, and most US chip companies haven’t yet announced the granting of licenses to ship to Huawei.
China also disagrees with reducing government subsidies that give domestic companies an unfair advantage over foreign competitors. Instead of reducing government support, China increased its spending and announced tax cuts for domestic companies. It aims to reduce its dependence on US technology by developing its own domestic semiconductor industry.
Analysts don’t expect the trade war to end anytime soon
Even though trade talks have restarted, a trade agreement is nowhere in sight. There have been no developments on the above-mentioned sticking points. Analysts believe that a lack of progress on key issues means tariffs won’t be lifted anytime soon, as they’re being used by each country to pressure the other to negotiate.
Many analysts believe that new tariffs will be levied by the end of the year. However, Raymond James analyst Ed Mills noted that the market will significantly discount the pause in the trade war until signs of trade escalations emerge. This sentiment was visible in the market’s movements. On July 1, the iShares Xinhua China 25 Index (FXI) rose 1.5%, the SPDR S&P 500 ETF (SPY) rose 0.9%, and the Nasdaq (NDAQ) rose 1.02%. The Nasdaq rose 8.4% in the first two weeks of July as the easing of the Huawei ban bought some respite to chip companies.
Height Securities analyst Clayton Allen stated that the restarting of trade talks has at least stalled the implementation of new tariffs until the end of the year. He added that Trump wouldn’t want the US economy to slow at the time of the 2020 presidential election. The elections could deter him from further escalating the trade war with China.