Washington Policy Analyst Ed Mills explains that a lack of clarity on phase one trade deal prospects has markets on edge.
Market sensitivity to U.S.-China developments has risen on a lack of clarity on the phase one deal’s prospects from President Trump and increased tensions over human rights issues. There remains a desire to avoid the December 15 tariffs, but a postponement will likely require a sign of renewed good faith – possibly in the form of material progress following in-person trade talks or a direct phone call from General Secretary Xi. The fate of the December 15 tariff increases remains the biggest issue of concern for the moment, which the market is likely upgrading the probability of in light of Trump’s recent approval of a bill in support of Hong Kong’s protestors and China’s threatened retaliatory actions, including the potential advancement of a long-touted “unreliable entity list” (similar to the U.S. entity list blacklisting) targeting U.S. businesses operating in China.
Escalating tensions over human rights issues threaten to culminate in the advancement of reciprocal actions by China that could see visa restrictions on U.S. lawmakers and the advancement of a blacklisting that places greater scrutiny on the Chinese operations of U.S. companies. Along with the threatened tit-for-tat, President Trump’s remarks on the sidelines of the NATO Summit point to the possibility of an extended trade battle that punts a deal until after the 2020 election.
We have consistently viewed this as the overall likely trajectory of the trade talks, as a phase one deal is effectively a “truce” agreement that may settle benchmarks to meet on broader questions such as industrial policies and intellectual property protections. In all, these developments raise fears in the final two weeks before a critical decision on the fate of the December 15 tariff increases. We believe a desire remains on both sides to avoid the tariffs, but it is difficult at this stage to determine the scope of the impact of the current tensions. While the headlines may reflect real difficulties in the U.S.-China relationship, it is also possible that Trump is setting up pressure points to incentivize a deal or diverting media attention away from the impeachment process.
The latest escalations are rattling the U.S.-China relationship after President Trump last week signed into law a measure in support of Hong Kong’s protestors, which China has responded to tepidly up to this point. On Tuesday, the House is expected to pass a further measure targeting what U.S. lawmakers view as human rights abuses in the Xinjiang province. The bill would require identification of and financial sanctions against Chinese officials seen to be committing human rights abuses. It would also further restrict exports of tech that may be used to perpetuate human rights abuses by Chinese officials. At this stage we view the Chinese unreliable entity list as less likely, but China may move forward on restrictions targeting U.S. officials central to advancing the Hong Kong/Xinjiang measures in response.
In the bill signing statement on the Hong Kong legislation, President Trump left open the possibility of not implementing key provisions on the view that they conflict with the authority of the executive office to set U.S. foreign policy. This is likely a signal to Beijing that U.S. actions in support of Hong Kong protestors will remain a card in the U.S. deck, but can be held off to allow negotiations to proceed.
We are still waiting on confirmation of whether a U.S. delegation will travel to Beijing at the invitation of Chinese officials that had been communicated late November. If a trip takes place, it could be announced sometime late this week for negotiations mid-to-late next week. This could provide an opportunity for officials to rebuild good faith around avoiding the December 15 tariffs. Alternatively, direct intervention by Trump and Xi following a phone call may further extend the current tariff schedule.
There is speculation that the November APEC summit could be rescheduled for some time in Jan., and an agreement of a one-month tariff delay by the two leaders would better align negotiations to such a timeline. This delay could be beneficial for both sides as it would likely see a decrease of Congressional attention on human rights issues given expected end of year actions on government funding, impeachment, and ultimately recess for the winter holidays, which could provide ample time to reset the U.S.-China relationship heading into 2020.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change.