August 1, 2019 / 5:32 AM / 24 days ago

China’s best-case trade deal looks worse and worse

REFILE - CORRECTING NAME U.S. Trade Representative Robert Lighthizer shakes hands with Chinese Vice Premier Liu He as U.S. Treasury Secretary Steven Mnuchin and China's Commerce Minister Zhong Shan look on during a family photo at the Xijiao Conference Center in Shanghai, China, July 31, 2019. Ng Han Guan/Pool via REUTERS

By Christopher Beddor and Pete Sweeney

HONG KONG (Reuters Breakingviews) - China’s best-case scenario for a U.S. trade deal looks worse by the minute. Negotiators on Wednesday evening wrapped up yet another round of negotiations, but made little progress. A tariff ceasefire brokered in June has dragged on, and President Donald Trump no longer seems enthused about a quick deal that could expose him to criticism ahead of a 2020 presidential election. With supply chains already migrating out of the mainland and economic growth slowing, time is not on Beijing’s side.

    Chinese officials probably still hope to persuade U.S. negotiators to wind down tariffs and ease pressure on the likes of telecom giant Huawei, in exchange for soybean purchases, plus token market-opening measures. Unfortunately, Trump’s recent comments suggest that is unlikely. He has hinted that China’s second-quarter GDP growth, a 27-year low of 6.2%, puts pressure on Beijing to make concessions. He has also suggested Beijing is drawing out negotiations, hoping a more friendly figure will succeed him in the White House. Neither suggests big compromises will be put on the table.

    The U.S. president has a point about the economy. Comments after a Politburo meeting this week sounded more anxious than after one back in April. There was no longer any mention of the push to reduce bad debts, for example. Instead, there was more emphasis on employment stability. Manufacturing activity has been contracting since June, with factories cutting jobs.

    Worries about softer demand, combined with uncertainty around U.S. tariffs and a tougher regulatory stance, have already prompted some foreign executives to hedge their investments in China. The more protracted trade discussions are, the harder it is for the People’s Republic to attract and retain outside cash. Trade does contribute far less to Chinese GDP growth than it used to, but exports of goods and services still comprises nearly a fifth of Chinese output, according to World Bank data.

    A deal, if it comes, looks increasingly likely to be limited in scope: perhaps a phased pull-back of tariffs, with some left in place, and relaxation of export curbs on Huawei, once potentially irreparable damage to its overseas market share is done. Hardening U.S. attitudes towards everything Chinese are unlikely to reverse. Any deal with Washington will be of little help there.

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