Thought May 06, 2019 / 04:30 am UTC

U.S.-China Trade Talks: Reaching Crunch Time

By Jeff Ng

U.S. President Donald Trump’s tweets on Sunday have rattled confidence in a trade deal between the U.S. and China. The U.S. and China may reach a conclusion sooner than later, but the chances of a no-deal are now higher.

Trump said in two tweets at the start of the Asian week that the U.S. will increase tariffs on $200 billion of goods from 10% to 25% on Friday, May 10. He also plans to impose 25% tariffs on an additional $325 billion of goods. 

Trump desires a quick deal which ends up in a high-profit official summit between the two presidents. However, details have bogged down its progress. 

The tweets mark a reversal in Trump’s stance toward trade talks. In Trump’s view, the U.S. is in a position of strength following a series of positive data releases, including the employment data that was released on May 3.

We previously estimated that the tariffs increase will reduce U.S. GDP medium-term by 0.3% and China GDP by 0.6%. This is despite some near-term benefits for the U.S. economy. If realized, the latest proposed tariff measures are greater than our previous scenarios. Hence, they could have a bigger impact. 

We believe that this is likely to raise pressure on China to concede. Recent reports stated that China was unwilling to cut back on subsidies to state-owned enterprises.

In our view, the U.S. and China will soon reach a conclusion. Trump’s pushes are likely to move the trade talks to a close earlier than not. However, it may also push China against seeking a trade deal. China is now considering whether to delay or cancel its Washington trip this week. 

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Analyst Declaration
I, Jeff Ng, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.