Trump also reaffirmed that China agreed to start buying more agricultural products from the United States immediately. He added that both he and China's Xi "want this deal to happen, and it probably will. But if not remember remember I am a Tariff Man."
Sputnik spoke with Allan von Mehren Chief Analyst Danske Bank, China economist for more insight on the issue.
Sputnik: Yesterday we witnessed massive stock market rallies after it was revealed that the US and China had agreed to halt new trade tariffs for 90 days. Does this mean that the markets really believe in a potential agreement?
Allan von Mehren: I think it means the markets see the risk of a further escalation of the trade war as less likely – and that the probability of an end to the trade war in 2019 has gone up.
This should be reflected in a bit lower risk premia in equity markets. So from that point of you I think a rally is well justified.
Allan von Mehren: I think a few factors will be important. The first one is of course how much China will offer in the negotiations. Judging from the signals after the dinner, there should be a good chance that they can make ends meet, in my view.
It’s also important they follow through on their promise to buy more farm products immediately. The second factor important is how the US economy and markets develop. Any signs of US slowdown, will make Trump more eager to make a deal as any negative data or lower markets would weaken his hand. Third, I think the development in USD/CNY is important.
We’ve seen the biggest two-day decline in 13 years the past two days. This will be good for negotiations as it will signal China is already acting on its’ promise to do something about the Chinese devaluation as US Treasury Secretary Mnuchin said they had promised yesterday.
Sputnik: How does the personal relationship between Trump and Xi Jinping impact the issue of trade?
Sputnik: Do you think Trump changed his economic tactics when China began to purchase agricultural products from other countries (Russia, Brazil), hurting American farming areas?
Allan von Mehren: I don’t really think Trump has changed tactic – at least since May. His strategy, in my mind, is to use tariffs to put pressure on China and get the best possible hand for negotiations.
What has changed now is that US stock markets have started to decline — and no longer only Chinese markets. If Trump escalates even further (as he has threatened to do) he risks that US markets suffer even more and he would weaken his own hand in the trade talks. The poor results in the mid-term elections when it comes to important swing states has also shown him, that he needs a good deal for the farmers and for the car industry before the 2020 election campaign kicks off.
In general I think the 2020 election will be a very important factor as he will want to go into the campaign with a deal that has benefitted farmers and the car sector, among other things. Michigan for example is a swing state and a big centre for auto production. Iowa, Ohio and Wisconsin are also swing states and have lots of agriculture.
And escalating the trade war would risk triggering a big drop in markets and a weakening economy. One should not forget the importance of the 2020 election for Trump in his decisions from here.
Sputnik: How will both parties deal with other serious issues regarding trade, such as Chinese industrial espionage?
Allan von Mehren: It’s a good question, but I think China will give a general statement it will not do that and punish companies that does. Also I think regardless of a trade deal, we will continue to see a long-term rivalry and we move from trade war to tech war.
US will put substantial restrictions on Chinese investments into technology sectors in the US as well as tighten export controls of US technology to China even more.
A trade war will not solve the longer term prospect of China overtaking the US as the biggest economy and the challenges this big power rivalry will give.
Views and opinions expressed in this article are those of Allan von Mehren and do not necessarily reflect those of Sputnik.