Tariffs Loom, Yuan Falls and Kudlow Stays Optimistic on China

(Bloomberg) --

Give Larry Kudlow credit for maintaining some optimism about U.S.-China trade talks amid few obvious signs of improvement.

Speaking on Fox Business Network, the director of President Donald Trump's National Economic Council said deputies from both sides had a “productive” and “constructive” conference call this week.

“They’re going to come back in a few days for a second conference call, and we’re looking at some of the key aspects of a trade deal,” Kudlow said Thursday in Washington. “This new process that’s unfolding, it looks to me to be a positive one.”

So deputies are talking — that is a good sign. But deputies often handle the non-controversial stuff, lay the groundwork, leave the big issues to their bosses. Here are a few more doses of reality that may complicate the path ahead:

• More tariffs are coming. Barring some serious backpedaling by Trump or generous Chinese concessions soon, an estimated $110 billion of Chinese imports will be hit with 10% tariffs in nine days. Another $160 billion get hit Dec. 15. They could slow China’s economy to the weakest growth since 1990.
• Beijing will strike back. “China will be forced to retaliate if the U.S. follows through with new tariffs,” Ministry of Commerce Spokesman Gao Feng said in a press conference on Thursday. That retaliation will come soon, according to a Friday tweet from Global Times editor-in-chief Hu Xijin.
• The yuan is sliding again. Trump declared China currency manipulator earlier this month after it briefly sank through 7 to the dollar. This week it approached 7.1. The move could signal that the People’s Bank of China will let the currency weaken gradually to offset the tariff fallout.

So a big question now: In such a sensitive environment, can the deputies make enough progress to ensure the top officials can still meet in the U.S. as planned in early September? In his answers, Kudlow added a note of caution to his optimism.

“Hopefully we are still planning on having the Chinese team come here to Washington D.C. to continue the negotiations,” he said. “I don’t want to predict, but we will see.”

Charting the Trade War

As Group of Seven leaders meet in France this weekend, the chief sticking point when it comes to U.S.-EU trade negotiations is Trump’s demand that Europe open up its closely protected agricultural industry. So far, the EU insists agriculture is off the table. 

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To contact the editor responsible for this story: Zoe Schneeweiss at zschneeweiss@bloomberg.net

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