Stepping Back From the Brink?

With Donald Trump saying he expects to sign a “fantastic” deal with Xi Jinping next month in Santiago, Chile, the U.S. may be stepping back from the brink of escalating a tariff dispute into a full-blown trade war with the world's second largest economy. It is likely that some form of a deal will be reached, but even if the negotiations fail, just published third-quarter macro data suggests that China has the capacity to mitigate the impact of a broader dispute and maintain the world's best consumer story.

What to expect in Santiago

Progress earlier this month in the U.S. – China trade talks represented an important reset in the tone of bilateral relations. There is no guarantee that both sides can agree on the details before Trump and Xi meet during the November 16-17 APEC (Asia-Pacific Economic Cooperation) summit in Chile, but the shift in Trump's attitude is very significant in an administration where the president's feelings are more important than the substantive issues in front of negotiators.

Trump's enthusiastic comments leave me optimistic that a formal deal can be concluded next month. Stating that the two sides had already “come to a deal on intellectual property, financial services,” as well as “a tremendous deal for the farmers,” Trump said, “I have very little doubt that we'll be able to get this thing finalized now. It's not overly complex.”

The president remarked “there was a lot of friction between the United States and China. And now, it's a lovefest.” He also provided some domestic political cover for Xi, describing the deal as “fantastic for China” as well as “fantastic for the United States.”

I remain convinced that both sides are highly motivated to conclude a deal. Trump appears to recognize that a deal is better than no deal for his re-election prospects. No deal would mean continued taxes on Chinese goods, paid for by American families and businesses. No deal would mean a continued Chinese boycott of American soybeans, which is contributing to harsh conditions for farmers in politically important states. No deal would mean continued economic uncertainty, which is leading to weaker corporate CapEx and worries about a recession.

The tariffs are not a huge problem for Xi, as China is no longer an export-led economy, but failure to conclude a deal would open up the risk that a trade war leads to restrictions on China's access to American tech, everything from semiconductors to research collaboration. That would be a significant setback to China's economic growth, which Xi wants to avoid.

Details of the tentative deal have not been disclosed, so we don't know whether the disruption caused by the tariff dispute will have been worthwhile (I doubt it), but in my view that is of secondary importance. Even if the deal only takes the trading relationship back to where it was a couple of years ago, that is important—lessening business uncertainty and creating an opportunity for reducing bilateral tensions across a wide range of issues, from technology to investment.