Photo: AFP/Jim Watson

The markets were again moved by US-China trade headlines on Tuesday, with top White House economic adviser Larry Kudlow tempering pessimistic remarks he made earlier in the day with a touch of optimism.

“In [President Donald Trump’s] view, there’s a good possibility that a deal can be made. And he is open to that,” Kudlow told reporters on Tuesday afternoon.

Major US equities benchmarks erased earlier losses to finish with modest gains or flat, reflecting the ambivalent market sentiment about the potential for progress to be made at a dinner between Trump and his Chinese counterpart Xi Jinping at the Group of Twenty summit on Friday.

“Having said that,” Kudlow added, there are “some caveats as always.”

Likelihood of a deal

“I see a 50% chance of a tariff escalation,” Xu Sitao, chief economist for Deloitte China, told Asia Times of Trump increasing the rate on existing China tariffs from 10% to 25%. “There’s less of a chance of adding US$267 [billion] worth of Chinese goods to the list.”

When asked whether he thinks China is willing to tough it out and refuse to make concessions, Xu said “no,” adding, “that would be the wrong strategy because the US is working with Europe and Japan … if there is increased market access that would be for everyone.”

Kudlow also mentioned cooperation among the major developed economies in his comments on Tuesday, citing an agreement to push for reforms at the World Trade Organization signed by the US, the European Union and Japan.

But not everyone is convinced that China is willing to make significant concessions under pressure.

Michael Pillsbury, director of the Center on Chinese Strategy at the Hudson Institute, who advises the Trump administration on China policy, told Asia Times there is little likelihood of concessions from China.

“Unfortunately we are dealing with a very stubborn Chinese side which will not make an offer,” Pillsbury said in an e-mail on Tuesday. His comments echoed what Kudlow told reporters before the press conference earlier in the day.

“We can’t find much change in their approach … President Xi may have a lot more to say in the bilateral [meeting] … I hope he does, by the way, I think we all hope he does … but at the moment, we don‘t see it.”

What is Beijing willing to offer?

The distance that remains between the two sides has cast a shadow over recent optimistic comments from Trump. The US president also played down prospects for a deal in an interview this week, though some dismissed his statements as posturing ahead of negotiations.

At the press conference on Tuesday, Kudlow reiterated the list of asks from the US side, saying that “issues of intellectual-property theft must be solved. Forced technology transfers must be solved. Significant tariff and non-tariff barriers must be solved. Issues of ownership have to be solved.”

Judging from recent Chinese moves, some of the asks may be on the table.

This week, Germany’s Allianz became the first foreign insurance firm to gain approval for a wholly owned subsidiary in China.

Regarding reforms to foreign ownership, Xu said that it may even help mitigate IP transfer-related complaints. “If China can adjust JV requirements – really relaxing JV requirements – I think the argument of forced technology transfer would be, not solved, but mitigated.”

In a recent report, Beijing-based think-tank the Center for China and Globalization suggested that forging a bilateral agreement on intellectual property rights might also be possible. But CCG president Wang Huiyao stopped short of acknowledging government pressure for Chinese companies to force technology transfer.

That issue, specifically, has consistently been one of the most important impasses cited by Trump administration officials, including US Trade Representative Robert Lighthizer, who is seen as a key figure in the trade deals the US has renegotiated with Canada, Mexico and South Korea.

Regarding tariffs and subsidies for state-owned enterprises, it is unlikely that China will be willing to make more than incremental moves.

Strong US economy versus resilient Asia-Pacific

Another potential stumbling block for a deal is the divergent opinions regarding the relative resilience of the US and Chinese economies.

“Asian economies will hold up,” Xu said. “Even if you pick the worst country, they’re going to be OK next year.” In the worst-case scenario that the US adds $267 billion worth of Chinese products to the tariff list, he added, “The real economies will be OK, but financial markets may suffer.”

In his comments on Tuesday, Kudlow was less focused on long-term resilience and relative growth, saying that while the US economy is strong going into the meeting on Friday, China is in a slump.

Optimistic expectations about the Chinese economy are not shared by everyone in Beijing, but they represent confidence among many that closer economic integration with Japan and the fast-growing economies in Southeast Asia can weather a trade war in the long run.

Cementing close ties with European companies is also a top priority for Beijing, with China’s top US trade point man opting to travel to Germany instead of Washington ahead of the G20 summit.

The mercurial decider

When Trump sits down with Xi Jinping for dinner in Buenos Aires, neither the Chinese president nor the trade delegations will be the final arbiter. By most accounts, Trump – not his trade advisers – will decide what the US is willing to accept as a “win” in exchange for backing down on tariffs.

As things stand, if one were to judge from signals given by Beijing and the stated policy articulated by Lighthizer and Vice-President Mike Pence, anything more than an agreement to back off more tariffs and keep talking is very unlikely.

But Trump himself has consistently shown a willingness to change course and accept an offer after climactic threats.

“Again to repeat, and the president’s said, there is a possibility … that we can make a deal,” Kudlow stressed.

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