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Raoul Leering, head of international trade analysis at ING, points out that for now, there are no signs that the US administration is prepared to water down its demands and change its negotiation style.

Key Quotes

“Given the much tougher public stance of the Chinese authorities, further concessions would be a face losing event for Chinese leaders which also makes it unlikely that a deal will be cut anytime soon.”

“As a result, the two sides seem to be too far apart and the negotiating climate has deteriorated too much for a deal to be struck anytime soon. This makes it likely that a new round of negotiations will be unsuccessful as well. Chances are that the President will then follow through on his threat to extend the tariff hike to all imported goods from China. In which case, China will retaliate.”

“In the end, however, both sides have a strong incentive to strike a deal. Hoping for a more pro free trade democratic US president in 2021, China could, as President Trump suggested last week, decide to wait until after the US elections before it is willing to compromise. But a further deterioration in the tit-for-tat trade war will lead to significant economic damage for China because of its dependency on US demand.”

“Yet Trump also needs a deal. China is responsible for half of the overall American deficit in traded goods and Trump has vowed to take action. If he fails to get a result, he will only be able to point to the renewal of the Nafta trade agreement and a few smaller deals with countries on their exports of steel and aluminium to the US. That won’t be enough for the president to claim he has successfully reduced the trade deficit.”

“As such, the US administration has a strong incentive to drop some of its most far reaching demands, which in turn would allow China to make concessions of its own. If an agreement is to be reached in the near future, Trump will need to back down.”