;

US-China trade truce provides breathing space

TXF Weekly: The Week That Was

The cancellation of the hike in tariffs on imports from China into the US is giving rise to hope of a trade deal between the two countries and an end to the all-out trade wars. Jonathan Bell assesses the prospects.

This past weekend, ahead of the 1 March deadline US President Donald Trump dropped his threat to raise tariffs on $200 billion of Chinese goods. He also indicated that the two sides were getting very close to making a trade deal.

However, many questions are being raised on both sides as to why there appears to be some change taking place on this particular front. Is it because there are actually some concessions taking place? Have some goals been reached? Is there a better understanding by both sides or has it simply dragged on long enough? It is probably a bit of all of these things.

While immense speculation still surrounds the negotiations, there is at least hope that this latest development could spell the start of a more constructive approach to dealing with what has already been a highly damaging trade war for both sides. Pragmatism needs to kick in at some point. As we all know, there are no real winners in a trade war!

The last time I waltzed fully into this bilateral trade war arena in a full blog was back on 8 August 2018 in the article US-China trade punches. A lot has happened in the meantime – economically and politically. Last year was also a rollercoaster ride for stock markets hit left and right by the trade fallout, with many losing heavily on their portfolios. Last year, US stocks had their biggest annual decline since 2008. Voters in the US do not want to see this repeated. It was also a very damaging time for many farmers, producers, corporates and consumers as they felt the brunt of the tariff wars and ultimately picked up the bill.

Following the talks that took place last week and on Saturday, Trump tweeted the following day: “I am pleased to report that the US has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues.”

He later followed that up with the tweet: “I will be delaying the US increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a summit for President Xi and myself, at Mar-a-Lago (Florida), to conclude an agreement. A very good weekend for US & China!”

Stocks markets rose on Monday after the Sunday announcement, with the Dow up about a half percent in afternoon trading and Chinese shares up more than 5% overnight.

On the back of the news, China’s state-owned Xinhua news service reported that the two countries were getting “closer to reaching a mutually beneficial and win-win agreement”. It also said: “The extension of the latest round of negotiations and the delaying tariff increase on Chinese imports testify to the sincerity, high attention and sense of urgency of both the Chinese and US sides. Yet they also indicate that there are still some differences that need more time to be ironed out.”

As Trump’s first tweet indicates the trade talks have moved on from simply China purchasing more US products. Rumours were circulating on Monday that China had committed to buy up to $1.2 trillion in US goods. Any increase is likely to be centred on a much bigger purchasing pattern of US agricultural products, but also a hefty long-term offtake of US liquefied natural gas (LNG). And recently China also offered to buy $200 billion of US semiconductors over a six-year period.

The US is now at a stage where Trump needs to show some of his core voters, particularly in the farming mid-West, that his tariff trade war with China has paid off. Many farmers have suffered heavy losses because of China shifting its purchasing of agri-goods to other countries over the past year. And because of continued corporate USA imports of Chinese products (regardless of tariffs) the US trade deficit with China for 2018 is expected to be in the region of a record $400 billion.

What is going to be crucial now for what observers are calling a ‘real deal’ is serious developments on the so-called ‘structural reforms’ that the US has been seeking in its trading relationship with China. So, what are these ‘structural’ elements?

First, is probably the currency debate – the US wants China to avoid artificially weakening its currency in order to offset any US tariffs. For a long time the US has complained that China’s currency is too weak, and that the country uses it as a trade weapon. This is a hard one to predict an outcome, because China needs to be careful of damaging its own economy – although some assurances can be expected from Beijing.

Also high up on the agenda is the issue of strengthening intellectual property rights protection and the enforcement of that. Much of this has improved in recent years, and this is a two-way street for Chinese companies also. Beijing has also established new courts to deal with these issues. Enforcement of IPR is something which is regularly wheeled out – but it seems that this is an area where a good agreement can be reached.  

Opening up the Chinese industrial sector to US companies is another structural reform which is being sought. Previously, any collaboration within China had to be done on a joint venture basis. However, this is already changing, particularly in the auto and finance sectors, and Beijing could make further adjustments in this area.

Connected to the issue of industrial collaboration is the expected/forced technology transfer requirements which has been a practice within China with foreign firms. Reports indicate that China is pushing through new investment laws to stop such practices from taking place.

Another key issue is the end of cyber intrusions by agents of the Chinese government. This is an area which will prove tricky to reach any agreement on as Beijing denies it is involved in any such activity in the first place.

In addition to these, the US will be looking for some movement from Beijing on the issue of state subsidies for certain industries – particularly with electric vehicles and other electronic equipment. Greater transparency in this area could be a difficult thing to achieve.

From Beijing’s side it is highly likely that they will take a firm line with the US over the action that the US is pursuing with Huawei Technologies. Some voices within the US administration have urged Trump not to issue an executive order that would ban Huawei and other Chinese telecoms companies from US networks for fear this will undermine the trade negotiations. But damage is being done all the time, with the US secretary of state Michael Pompeo urging allies of the US not to use Huawei or ZTE equipment in new 5G networks. The arrest of Huawei’s chief financial officer, Meng Wanzhou, and charges made by the US, is also something which has deeply angered Beijing.

Something which is rarely mentioned, but which is another consequence of the trade war is that China’s investments into the US have dropped off a cliff through 2018. According to a new report, foreign direct investment (FDI) from China into the US plummeted by 83% in 2018. These are significant values and any loss of FDI is damaging to the US economy. The US does impose certain constraints on Chinese investments into the US – something which Beijing would like to see removed.

Trump is certainly keen to move on, and there are reports that he has become somewhat frustrated with his top trade representative, Robert Lighthizer. Trump has openly said he wants a firm agreement, and has poured water on Lighthizer’s suggestion that a deal would take the form of a memorandum of understanding. Lighthizer is known as a China trade ‘hawk’, and he is widely seen as the one continuing to push for a hard line with Beijing. This is a very fluid situation – and as I write this, Lighthizer is appearing before the Ways and Means Committee in Washington DC to be grilled by politicians on the US-China trade negotiations.

Some critics of Trump, who think he is ‘giving in’ too early to China, expect most (or all) of the ‘structural elements’ to be in any trade deal. This is unrealistic, and a more pragmatic approach is needed to move forward. What is clear is that significant ground has already been made on some of the key structural issues – as indicated in Trump’s tweet above. Further reforms could take place, but it will require time. It has now been over seven months since the US first imposed tariffs on Chinese imports. The US-China trade war has impacted the global economy badly. For now, trade needs to come back onto an even keel.

It is in the interests of both sides to try and make this trade agreement work. For Trump he also needs a flag to wave on this issue as a political success. With the 2020 US elections not far off, Trump also needs the US economy to be on the up, not heading into recession – and the US stock market needs to be buoyant. So, it is likely to be all eyes on the summit that Trump will have in late March with China’s President Xi.

Beyond that, unfortunately Trump appears to be lining up the EU as the next victim for a heated tariff war. This is expected to be directed at EU exports of autos and auto parts – and if it comes about we will no doubt be calling it ‘car wars’. Germany, the UK, Italy and Austria are the EU countries with car manufacturing sectors most exposed to any such action from the US. With economic growth at such low levels in most EU countries, the timing could be economically disastrous – particularly for the UK economy which is floundering because of Brexit, and for Germany which has the most auto exposure.

This all comes on top of the changing face of the global auto manufacturing sector, something which the UK is currently experiencing with Honda’s decision to close its Swindon, UK manufacturing plant and move the production back to Japan. Interestingly, this decision is not so much about Brexit Britain as the EU’s new trade pact with Japan which will see the EU reduce tariffs on Japanese auto imports from 10% to zero. Ironically, it was the UK which pushed hard for the EU-Japan trade pact. Ouch!

Now time to get up to speed on the markets.
   Here's
 our exclusive TXF Essentials subscriber content

AIIB: Shaping a different DFI offering
The Asian Infrastructure Investment Bank (AIIB) has released a downbeat report on the prospects for private infrastructure investment in Asia. But, says Joachim von Amsberg, AIIB vice-president for policy and strategy, the bank can drive improvements where other DFIs have struggled.

Partnering for success: The UAE's new export credit agency
TXF sat down with Massimo Falcioni, chief executive officer of Etihad Credit Insurance, to discuss the UAE’s plans for its brand new ECA.

Plus, to top things off... the news you thought you had but didn't

Pakistan's Kohala hydro plant FC delayed to 2020
China Three Gorges South Asia Investment – a joint venture (JV) between China Three Gorges (70%), IFC (15%), and Silk Road Fund (15%) – will not reach full financial close on the $2.5 billion 1,124MW Kohala hydro power plant in Pakistan until 2020.

ENGIE led consortium to close Senegalese solar Q2 2019
ENGIE, Meridiam and Senegalese sovereign fund FONSIS are set to reach financial close in Q2 2019 on the 30MW Toube and 30MW Kahone solar plants in Senegal.

More details on Core Valley rolling stock financing
An SMBC Leasing/Equitix team closed a £552 million ($695 million) institutional investor-backed loan to finance the procurement of rolling stock for KeolisAmey's Wales & Borders rail franchise in December 2018.

Siam Cement eyes more ECA debt for Long Son plant
Thailand's largest cement company, Siam Cement, is looking to upsize the ECA portion backing the $5.4 billion Long Son petrochemical complex in Vietnam

Two bid for Silverton Tunnel
Two consortia have submitted bids to Transport for London (TfL) for the £1 billion ($1.3 billion) 1.4km Silvertown Tunnel project.
BAPCO to reach full financial close end of Q1 2019.

State-run Bahrain Petroleum Company
(Bapco) is expected to reach conditions precedent and full financial close on a $4.1 billion ECA-backed loan to finance the expansion of the Sitra oil refinery at the end of Q1 2019.

Bridge Power CCGT nears bank mandates
The Early Power consortium – a joint venture between Endeavour Energy (majority shareholder), GE and Sage – are near to commercial bank mandates for the second phase of the 400MW Bridge Power CCGT project in Ghana.

Macquarie looks to mandate banks for Hobart Airport sale
Macquarie Global Infrastructure Fund III has approached banks to arrange a two-stage auction for its 51% share in Hobart International Airport. The 10-year closed-end fund was launched in 2006, and although it has been extended, is scheduled to wind down in September.

RAPID to mandate banks by end of Q1 2019
Sponsors of the $15.3 billion Pengerang refining and petrochemical integrated development (RAPID) project in Malaysia – Petronas (50%) and Saudi Aramco (50%) – are expected to mandate banks by the end of Q1 2019 on a $3.5 billion ECA-backed bridge loan refinancing.

Pertamina seeks financing for Balikpapan expansion
State owned oil and gas company Pertamina is seeking financing for the Balikpapan refinery expansion in East Kalimantan, Indonesia.

JTB gas field RFP launched
Pertamina EP Cepu has launched a request for proposals (RFP) for financing the Jambaran Tiung Biru (JTB) gas field unitisation project in Bojonegoro regency, East Java.

Sign in to post a comment. If you don't have an account register here.

X

TXF MENA 2019 returns covering the opportunities at your fingertips across ECA, Project, Trade and Commodity Finance in this region. Senior and unmissable!

TXF MENA 2019