How U.S.-China Trade Progress Is a Mirage Soothing Markets

(Bloomberg) --

The news that the U.S. and China will be holding high-level, face-to-face negotiations in the coming weeks has predictably cheered financial markets wary of the growing economic fallout of the trade war between the world’s two largest economies. However, that reflects how eager investors have been to seize on even the faintest positive signal rather than any material change in the talks.

There are plenty of reasons to be skeptical a peace is nigh:

• For all the summer recession fears the reality is the U.S. economy still looks to be in rude health. That is expected to be confirmed Friday morning when the latest non-farm payrolls data is released. But as good as that is for the U.S., the reality is a solid economy makes a deal between Washington and Beijing less likely. As long as the economic consequences are manageable ahead of the 2020 election, the pressure on President Donald Trump to offer any compromise is reduced.
• There are parts of the economy that are looking weak. America’s manufacturing sector has effectively been contracting since the beginning of this year and Trump’s tariffs are not helping. But, nationally at least, factory jobs so far have plateaued rather than collapsed. That also matters for the fight with China. It isn’t yet hitting Trump’s blue-collar base in worrying numbers.
• The coming dialogue is still talk about more talks. The two sides got close to wrapping up a 150-page deal in late April before negotiations collapsed in May due to a mixture of Chinese backsliding and the Trump administration’s refusal to commit to lifting any tariffs as part of a pact. But that was effectively the last time the two sides batted around issues of substance.
• Top of the agenda for the working-level discussions expected to begin in Washington in 10 days or so is where negotiations should resume. U.S. officials want to go back to the draft document they left on the table in May. The Chinese do not. If that standoff remains when U.S. Trade Representative Robert Lighthizer meets with Vice Premier Liu He a few weeks later, you can finally set aside the already fragile idea that any deal with China is possible in 2019.

Charting the Trade War

One country where traders are less obsessed over Trump’s tweets about China, is China. While their counterparts elsewhere grapple with the impact of Trump’s Twitter posts, equity traders in China don’t have easy access given the service is blocked there.

Today’s Must Reads

• Currency referee | Trump’s trade war with China is threatening to draw one of the global economy’s neutral umpires into the fray: the International Monetary Fund.
• Nearing recession | German industrial production unexpectedly weakened further in July as trade tensions and waning business confidence weighed on demand.
• Uncertainty costs | Trade frictions are holding back global economic growth and may weigh on the world economy into 2020, according to a Federal Reserve research note.
• No danger | European Trade Commissioner Cecilia Malmstrom said cars made in the EU don’t pose a threat to U.S. national security and shouldn’t be targets of tariffs.
• Oil change | An Indian state-owned refiner is mulling the purchase of American oil from Chinese sellers offering cargoes targeted with new tariffs on U.S. supplies.

Economic Analysis

• France outlook | The country’s economy, the least open economy in the euro area, may show signs of weakness amid trade threats.
• Container doldrums | Global container volume gained a mere 1.3% in the first half from a year earlier and slid 1.1% sequentially, dragged by weaker manufacturing activity and a global economic slowdown.

Coming Up

• Sept. 8: China trade balance
• Sept. 9: Germany, Taiwan, U.K. trade balances

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

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