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Bad timing for a trade war. US and China to make a truce

4 Jan 2019 18:12|Marcin Lipka

"The worldwide economic slowdown, fear in the markets and concerns from entrepreneurs, can all help to create one positive outcome. Beijing and Washington will decide on a truce on the trade war," writes Marcin Lipka, Conotoxia Senior Analyst.

One month has passed since the meeting of the US and Chinese presidents in Argentina. It was followed by a phone call between Donald Trump and Xi Jinping. The first effect of the resumed relations was the suspension of new customs duties planned by the Americans on Chinese goods. Beijing, in turn, decided to reduce customs duties on cars imported by the Middle Kingdom.

2019 seems sentimental, as it marks 40 years since diplomatic connections between the powers were established. According to a statement by the Chinese Ministry of Foreign Affairs, there were only a few thousand visits between the countries in 1979, while currently there are about 5.3 million per year. The trade exchange four decades ago amounted to 2.5 billion USD, today it reaches 580 billion USD. A statement by the Chinese Ministry of Foreign Affairs also states that China is ready to work with the United States in order to introduce an important consensus reached by Presidents Xi Jinping and Donald Trump in Argentina.

Market forces a truce

Apart from the diplomatic assurances and mutual respect of the leaders, however, there is another more serious argument in favour of developing new relations between Beijing and Washington. It is all about the economy and financial markets.

2018 was the worst year for the US stock exchange in a decade. December's ISM reading from industry decreased the most since November's crisis in 2008. In many statements, entrepreneurs drew attention to the uncertainty related to the trade conflict. In turn, in China the industrial PMI fell below 50 points, suggesting a contraction of the whole sector. In order to stimulate the economy and promote credit growth, Beijing has decided to reduce its mandatory reserves.

Currently, political tensions and the related arguments may recede. Both Chinese and US officers will try to ease the dispute so that the responsibility for the global economic downturn does not fall on them. This is particularly the case in the United States, where, already in the third year of the president's term, the campaign before the next elections is beginning.

Let's forget about saving face

On Monday, the first round of official talks between Chinese and US negotiators will begin. There will be middle-level meetings with deputy ministers, and according to Bloomberg, these will be rather technical.

On the other hand, the Financial Times points out that Jeffrey Gerrish, Deputy United States Trade Representative, has, like his superior Robert Lighthizer, hawkish views on China. It seems, however, that such a composition of the delegation and the "technical" dimension of the planned talks may be intentional.

Waiting for a breakthrough in the coming days is dominated by tactical caution so that a more spectacular impression can then be made of the surprisingly good progress in the talks and the prospect of further successful negotiations.

This progress will not be simulated. The risk of a further economic downturn due to a worsening customs war is too great. Even if supporters of a confrontational approach accuse leaders of losing face, the alternative is much worse - an economic crisis. Donald Trump, who is counting on re-election, and Xi Jinping, who operates in the single-party system, will not want to face such a solution.

4 Jan 2019 18:12|Marcin Lipka

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