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Commentaries

PMC Weekly Review – February 25, 2019

A Macro View – Clock Ticking on March 1 US – China Trade Deadline

A US-China trade war continues to be at the forefront of global markets concerns. Though recent hopes of a breakthrough have made investors more positive, most still view the trade war as one of the major headwinds to global economic growth in 2019, as the ongoing trade tensions, which began seven months ago, have disrupted international trade and slowed the global economy. After a somewhat hairy 2018, a wind of change finally blew through in early December, as both countries agreed to a 90-day truce, which barred any new trade tariffs while negotiations are taking place. In early January 2019 in Beijing, the two countries held a fresh round of trade talks, lasting three days, and discussions appeared to have gone well. Though still unresolved, the countries seemed to be making some progress, with China pledging to purchase a substantial amount of US products amid rumors the US is considering lifting some tariffs in order to reach a deal.

As the March 1st  deadline for a US-China trade deal fast approaches, optimism is rising that the world’s two largest economies can bring the issue to resolution. Talks continued in Washington this past week, following Treasury Secretary Steven Mnuchin’s and US trade officials’ trip to Beijing last week. Lower-level officials held a round of talks on Tuesday and Wednesday in Washington, with President Trump commenting on Tuesday that talks were going well, indicating that he may be open to extending the March 1st  deadline in order to complete negotiations. High-level talks continued in Washington on Thursday and Friday. Most recently, news has circulated that negotiators are drawing up six memorandums of understanding on structural issues: forced technology transfer and cyber theft; intellectual property rights; services; currency; agriculture; and nontariff barriers to trade. Also, these memorandums are said to include a proposal for China to purchase an additional $30 billion a year of US agricultural products, a move that would help to improve significantly the trade imbalance between the two countries.

These memorandums mark the most noteworthy progress seen yet towards ending the trade war (now going on seven months). However, intellectual property theft, Chinese subsidization of state-owned enterprises, and forced technology transfer continue to pose a serious road block to reaching a trade agreement, unless President Trump chooses to make the trade deficit a priority. As comforting as it is that the two nations have begun to outline commitments regarding these structural issues, some of these changes (for example, the Chinese subsidization of state-owned enterprises), will not only take time to work out, but may not be made overnight. Enforceability is also an issue for many of the items, and it probably will need to be addressed. Though it remains to be seen, the United States also has not offered any real concessions thus far in return for the structural changes, other than removing the tariff barriers. However, given that 2018 marked its slowest growth in nearly 30 years, China may be slightly more motivated to come to an agreement.

The recent progress has been the most consequential we have seen between the two sides since tensions began, so the March 1st  deadline presumably will be extended. It behooves the US and China to come to an agreement, as both countries’ economies have been hurt by the ongoing trade tensions. We are more likely near the beginning of actual legitimate negotiations not seen in previous months between the two nations, rather than close to an immediate resolution. If, however, the two countries fail to reach an agreement before the March 1st deadline, US tariffs are set to rise from 10% to 25% on $200 billion worth of Chinese imports.

Rachel Mandeix
Portfolio Manger

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