U.S.-China Trade Deadline Extended, but Hurdles Remain - Butler Financial, LTD
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U.S.-China Trade Deadline Extended, but Hurdles Remain

The extension is a positive sign, but reaching and implementing a “grand bargain” may be challenging, cautions Washington Policy Analyst Ed Mills.

February 25, 2019

The March 1 tariff increase deadline for U.S.-China trade talks will be extended as negotiators have made “substantial progress,” but risks remain given a lack of specific details around agreed points and a Trump-Xi meeting still forthcoming. The extension is clearly a positive sign and it appears that President Trump very much wants to declare a near-term victory. However, we remain cautious on a “grand bargain” and the potential difficulties during the necessary implementation and enforcement period. We do not want to take away from the positive headlines, but we also continue to believe U.S.-China trade headlines will remain for the foreseeable future.

Extension of March 1 Deadline

A tariff increase to 25% on $200 billion Chinese goods will be put on hold as the U.S. and China continue negotiations that are likely to require a second Trump-Xi summit later in March (potentially at Mar-a-Lago). President Trump appeared to soften trade-related actions this week by holding off on an executive order that would ban Chinese telecom equipment from U.S. networks and not advancing recommendations by the Department of Commerce on increasing auto tariffs. We viewed this as temporary concessions to bring the two sides closer to a deal as talks were extended through the weekend. A second Oval Office meeting last Friday between President Trump and China’s lead negotiator Liu He revealed that positive progress had been made on agriculture, currency, cybersecurity, intellectual property, non-tariff barriers, services, and technology transfer issues – all seen as key parts of any eventual deal.

Talks Trending Positive, but Underappreciated Risks Remain

Although the administration is touting positive progress, we note that there have not been specific details released about China’s concessions on U.S. demands. Key among the signals we would be watching for that would indicate an agreement is within reach include enforceability of terms. The U.S. side has been skeptical of China’s follow-through on key asks, and would be looking to establish parameters around the snapback of tariffs or progress China would need to demonstrate to have current tariffs lifted.

We have also seen disagreement around the actual type of agreement the two sides will reach. It had been reported that U.S. negotiators were pushing for specific and enforceable memoranda of understanding (MOUs) – an idea that Trump dismissed during Friday’s Oval Office meeting in favor of a “trade deal.” A formal trade deal may run the risk of needing Congressional approval in order to become effective, which could open the door to push back and criticism from lawmakers. Further, the administration appears to be viewing a Trump-Xi meeting as key to an ultimate agreement. As we wrote in the lead up to the first Trump-Xi summit in Buenos Aires, having Trump as the lead negotiator raises the uncertainty around the final outcome. The President is said to be leaning towards completing a deal sooner rather than later – a fact that could push Chinese negotiators to offer less in terms of concessions to speed up talks.

Although we appear to be heading towards the home stretch, developments over the next several weeks will be crucial as we gauge the scope of the deal and willingness between the two sides to wrap up talks to diffuse trade tensions. Finally, we need to see how what the media and public perception of any deal develops. President Trump has shown a willingness to abandon deals after negative press coverage or political pushback from certain constituencies.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

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