The Week: As trade talks resume, how optimistic should we be about the prospects for a deal?
  • Expectations are low, which may keep volatility in check
  • Donald Trump has an election to win and the US manufacturing sector is feeling the heat.
  • Chinese officials appear unwilling to disrupt their industrial strategy to accommodate the US

US-China trade talks start again this week. While this would normally prompt a new round of volatility as investor expectations are raised and then subsequently dashed, this time, expectations are low. This may keep volatility in check, but is there any chance of progress? 

China has talked down the prospect of a deal, saying that ‘no progress’ is its base case. The inflammatory move by the US to blacklist eight Chinese technology firms did little to smooth relations ahead of the talks. To be fair, this was simply a response to stonewalling by the Chinese, saying they would not allow any discussion of intellectual property issues. Given this is a key beef for the US administration, this was also provocative. 

Nevertheless, there is perhaps more pressure on the US administration than there has been previously. Donald Trump has an election to win and the US manufacturing sector is feeling the heat. The ISM US manufacturing purchasing managers’ index came in at 47.8% in September, the lowest level since June 2009. 

The President will almost certainly try to secure a grand, symbolic win from the Chinese. This allows him to boast a little back home, but refocus on other, more pressing areas such as his re-election campaign. He’s also opened up a new front in the trade war in the EU – he is planning to impose tariffs on about $7.5 billion worth of European aircraft, agricultural and industrial goods later this month. He’ll need to conserve some energy for this new spat. 

On the Chinese side, there are signs that officials are not willing to disrupt their industrial strategy to accommodate the US. Bloomberg recently reported that lead negotiator Vice Premier Liu said he would not include commitments on reforming Chinese industrial policy or government subsidies.

This doesn’t appear to leave a lot of room for negotiation. Stranger things have happened, and the two sides may yet make progress – or at least claim progress. It is difficult to see anything meaningful being agreed, but markets appear to have priced that in. 

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