A major focus for markets next weeks is the US/China trade talks in Washington. After the US reportedly turned down an offer of preparatory talks this week talks will begin on Monday, with China’s Vice Commerce Minister, Vice Finance Minister and central bank, PBoC governor.
It is unclear who on the US side they will meet, but the idea is to prepare the ground for the heavy weight talks between US Trade Representative Lighthizer, US Treasury Secretary Mnuchin and China’s top economic official Liu He, from Jan 30 to 31.
Both sides need a win on trade and markets are pinning their hopes on some form of a deal. The reality is that they are still very far apart on a number of issues. As highlighted by US commerce secretary Ross, a trade deal is “miles and miles” away.
The easier issues on the table are increased purchases of US goods by China, something that China has already said they will do, in order to help reduce the record Chinese trade surplus with the US. The tougher issues are more structural, including forced technology transfers, state subsidies, discrimination against foreign companies, regulations on intellectual property etc.
Not only is the US determined to gain China’s agreement on the above issues, but is also looking to find ways to ensure compliance monitoring. However, China does not believe that foreign companies are transferring technology to Chinese companies, while they have already offered measures to increase access to foreign investors. Overall, this means there is little room for negotiation.
In any case with just over a month left before the March 1 deadline that President Trump has set before he imposes increased tariffs of 25% on around half of Chinese exports to the US, there is little time to thrash out a deal on the key structural issues that would likely satisfy the US administration.
The likelihood is that negotiations will not be completed, especially on structural issues, leaving markets very little to be excited about. While both sides may leave the talks, claiming a degree of progress, this will not be sufficient to allay concerns. Risk assets will look vulnerable against this background.