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Home / Business / Wall Street doubts grow as US and China struggle to conclude 'lean' trade agreement

Wall Street doubts grow as US and China struggle to conclude 'lean' trade agreement



Xinhua News Agency / Getty Images

President Donald Trump in the Great Hall of the People in Beijing, China's capital. The US and China are struggling to complete a "lean" trade deal after nearly two years of arguing.

The doubt about a so-called "thin" deal between the US and China resurfaces on Wall Street a month after an apparent breakthrough in the trade talks helped keep the stock market at fresh highs all the time.

The two nations have struggled to get the latest refinement on a so-called phase-one deal they announced to great fanfare in an October 1

1 incident at the White House. The tentative agreement is believed to be the first step in a broad agreement that resolves a series of fierce competition issues between the world's two largest economies.

The first part of the deal is related to the US delaying some pending tariff increases and China agreeing to buy a certain amount of agricultural crops in the Midwest, but the two sides are struggling to even get the modest compromise to the finish line.

Chinese leaders insist that the White House rolls back tens of billions of dollars in goods in what could become a major stumbling block.

For its part, Trump wants a firmer commitment from China to buy US agricultural products. He is reportedly more open to reversing existing tariffs as part of a larger deal, but only in return for more concessions from China.

The two sides still have not agreed on where to meet if they actually come to a phase one agreement, and they do not actually have a set deadline.

"Trade agreements in the modern age are hard to do," said Neil Shearing, chief economist at Capital Economics. They cover a range of modern issues such as labor, safety and environmental standards, he noted, and require new rules on how to handle services such as banking and entertainment.

In many cases, these agreements take many years to come to an end. The original North American Free Trade Agreement took about four years from start to finish. A compensation deal drafted by Trump has still not gone into Congress two and a half years after work on an updated treaty began.

The process has also taken part in the "Brexit" negotiations between the UK and continental Europe as the UK seeks to go its own way.

How will two nations like the United States and China – much further apart in geography, culture, and political systems – solve thinner issues of trademark rights and technology transfer? Analysts are wondering.

"We are skeptical that enough concessions will be made to make the ceasefire last," said Innes McFee, CEO of Oxford Economics. "Instead, both sides appear to be digging for long-term hostilities."

Trump has even had a tough talk again after a month of reassuring words about the benefits of a phase-one deal.

"Look, China must make a deal I like," he said during a Cabinet meeting in the White House on Tuesday. "If we do not make a deal with China, I will just raise tariffs even higher."

Read: Trump's agenda is a double-edged sword for the American world economy

The next round of US tariffs will come into force on December 15. Wall Street focuses on that date as a deadline for what economists call a "lean" trade deal, but there is a growing sense that talks may be entering the new year.

The rally in US stock markets

DJIA, -0.24%

SPX, -0.08%

can be threatened if the calls break down again, analysts warn.

Read: It's great stock market sets records, but it's not because the economy is good

"Should a deal not be reached and tariffs raised further for US trade with China and Europe, we would expect that the world economy will continue to slide, possibly in recession in the coming quarters, "Deutsche Bank argued in a new report.

The fear of further financial damage is what keeps the negotiations alive. The two countries returned to the negotiating table in the fall after 19 months of standstill caused the US and Chinese economies to slip.

The pace of economic growth in the United States, hampered by weak exports and business investment, fell to 1.9% in the third quarter from 3.1% in the first three months of the year.

China, for its part, experienced the slowest growth in the third quarter of 27 years, and it continues to lose production contracts to other nations such as Vietnam that are not burdened by high US tariffs.

With the 2020 election coming up, Trump has a lot of incentive to accept a partial deal even though it is more symbolic than material, analysts say. US tariffs on China have hurt farmers and producers in the Mid-North States that helped Trump win in 2016. His administration feels the political heat.

Read: U.S. stock market on record, but farm bankruptcy at its highest since 2011

Adding a flammable situation are fresh protests in Hong Kong and a potential U.S. reaction if China turns to a violent intervention. Congress this week passed several bills aimed at supporting pro-democracy protesters.

"The president made it clear that it will be very difficult for us to make an agreement with China if there is violence or if the matter is not properly and humanely dealt with," Vice President Mike Pence said on Tuesday.


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