Is a trade breakthrough really likely at the G20?

Leaders of the G20 meet in Buenos Aires this weekend, with talks over trade keenly watch by markets.

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  1. Garry White

Donald Trump famously loves a well-done steak garnished with tomato ketchup. So, Saturday’s dinner date with Chinese President Xi Jinping in Argentina, a country famous for the quality of its beef, is likely to be right up his street. This weekend’s G20 summit in Buenos Aires has the theme of “building consensus for fair and sustainable development” and will have many photo opportunities for world leaders. But, for markets, the only important meeting is the Trump-Xi meal, as the two powerful leaders face off over the table in attempt to find some resolution to the damaging trade war. But is any truce really that likely?

Many market participants had hoped that President Trump would have come to a deal with China before the midterm elections. However, this did not happen. There was even an acceleration of tensions after Vice President Mike Pence accused China of "predatory" economic practices, military aggression in the South China Sea and of trying to undermine President Trump. The speech led some to declare the start of a “New Cold War”. However, in the last few days there has been some optimism in markets that a positive form of words could be agreed this weekend. This followed comments from Larry Kudlow, the White House’s economic adviser, who noted that the summit offered “an opportunity to break through what has been disappointing discussions”. Saturday’s talks are likely to involve alleged Chinese theft of intellectual property, ownership of American companies in China and tariffs and non-tariff barriers. This comes ahead of deadline set by the Trump administration for tariffs on more than $200bn of Chinese imports to jump to 25% from 10% at the start of next year.

Mr Kudlow is clearly playing the “good cop” role. As usual, Donald Trump took the position of “bad cop” – warning of dire consequences should a deal not be reached. The president said he was considering slapping a third round of tariffs on $267bn of Chinese goods if a deal could not be done – and that would include tariffs on Apple products such as iPhones that are manufactured in the Asian nation, despite the impact this would have on US consumers. China has already made an offer with concessions, but President Trump said that it was not acceptable. “It's a pretty complete list, a lot of the things we asked for, but there are four or five things left off,” President Trump said. “We'll probably get them, too.”

It is clear that both sides will need to compromise if a deal is to be agreed. So far, the dispute has not resulted in a significant amount of unemployment in either China or the US, but if it rumbles on there could be serious economic damage in terms of price rises and job losses. Walmart, Coca-Cola and General Motors have already warned they may be forced to raise their prices should the dispute continue and soya bean farmers in the Midwest have had to be bailed out after China slapped 25% tariffs on their product in retaliation. This resulted in the crop prices falling to a ten-year low and the Federal government has had to put a $12bn package together to help save farmers from going bankrupt.

There are already signs that global trade is slowing. Data from the OECD this week showed that global goods trade barely grew in the third quarter. “Excluding large oil exporters, such as Russia and Saudi Arabia, G-20 trade was flat suggesting that the steady expansion seen over the last two years may have stalled as recent protectionist measures begin to bite,” the OECD said. Also, the US merchandise trade deficit widened to a second straight monthly record in October, as exports from the country fell. The goods-trade gap grew to $77.2bn from $76.3bn in September, according to Commerce Department data.

Because of this economic effect – tariffs act like additional taxes in a country and raise prices and hit profit margins – it is all parties’ interests to resolve this dispute. Trump’s bombastic tactics ahead of the meeting are similar to those seen during the renegotiation of Nafta with Mexico and Canada – and a compromise was ultimately reached that was not that different from the original agreement. But the best that market can hope for this weekend is some sort of framework agreement on basic principles with the details worked out in the next few weeks.

Both leaders will need to be able to sell the deal back home as a “win” but it shouldn’t be too difficult to issue a form of words that is reassuring for their domestic audience and world markets. Of course, it will take some time for China to open up its markets or show that it has improved its unfair practices on technology, so the “war” is likely to be with us for some time, but both leaders have an interest in easing these tensions. Although any agreement is likely to be short term – and it is very unlikely that a full trade deal will result the tête-à-tête – the market will be pleased by any progress. This could come in the form of a suspension of the tariff rises in January or an agreement to impose the duties but reduce them over time once certain milestones are met by China. But, with

A version of this article appeared in Friday’s Daily Telegraph.

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