uploads///China trade deal

China Trade Deal in Limbo as Trump and Xi Turn Foes

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Aug. 26 2019, Published 8:36 a.m. ET

  • The possibility of a trade deal with China diminished further last week after both sides raised tariffs on each other’s goods. Apple and Alibaba fell more than 4% on August 23. Microsoft and Amazon also lost more than 3% amid the broader market sell-off.
  • Previously, President Donald Trump called Chinese President Xi Jinping a “friend.” However, on August 23, Trump referred to Xi as an “enemy.”
  • Trump has also called upon US companies to leave China. Reportedly, companies such as Microsoft and Amazon have been planning to diversify away from China anyway.
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China trade deal

The possibility of a US-China trade deal has diminished after the recent escalation in the trade war. China has announced new tariffs on US goods. The tariffs are in response to the fresh tariffs President Donald Trump announced earlier this month. After China announced new tariffs, Trump also announced an increase in tariffs.

The President tweeted on August 23, “Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%.” He added, “Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%.”

President Trump has also called upon US companies to look for new sourcing destinations. Several US companies, including Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT), source from China.

What Trump wants from the China trade deal

President Trump has set lofty targets for the China trade deal. The US is seeking wide-ranging changes to China’s trade policies. It also wants the trade deal to be enforceable, and it’s seeking changes to Chinese laws. For China, these changes are too radical. The country sees these as a challenge to its sovereignty. It’s indicated that it can work toward lowering the trade surplus that’s currently hugely in its favor. However, the mere lowering of the trade deficit won’t impress President Trump.

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Meanwhile, Trump’s trade policies have further aggravated China’s slowdown. Reportedly, companies such as Amazon, Microsoft, and Apple are planning to diversify their supply chains away from China. Even if we get a trade deal with China, more US companies might diversify their sourcing away from the country.

Trade war fears spook investors

Optimism over the China trade deal was among the main drivers of the market rally in the first half of the year. US markets sold-off badly on August 23 as the trade war escalated. Apple and Alibaba (BABA) lost 4.6% and 4.3%, respectively, on the day. Microsoft and Amazon also lost 3.2% and 3.1%, respectively. Alibaba has reportedly delayed its Hong Kong listing amid protests there. Last month, Alibaba split its shares. The move was seen as happening in relation to its rumored Hong Kong listing.

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Problems aplenty in China trade talks

There’s a lot of disconnect between what President Trump is seeking and what China is apparently putting on the table. US-China trade tensions also have a geopolitical angle. Taiwan and Hong Kong have also emerged as flashpoints between the world’s two biggest economies. Recently, the US approved weapon sales to Taiwan. China fiercely opposed the move. Given the disconnect between US demands and what China is offering, a trade deal with China looks like a mirage for now. Some observers don’t see an easy way to fix US-China relations. Last year, Alibaba’s cofounder, Jack Ma, said that the US-China trade war could last up to two decades.

Friends turn foes

Previously, Trump referred to Chinese President Xi Jinping as a “friend” even amid the heat of the trade war. However, that apparently changed on August 23, when Trump tweeted, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” Trump frequently criticizes Fed Chair Jerome Powell. He criticized Powell even after the Fed lowered rates by 25 basis points last month. After the recent round of escalations, a China trade deal looks more difficult now. In the meantime, consumers in both countries will pay the price of the trade war.

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