Trade War: No Deal

The Guardian: US-China talks end in increased tension and demand for $200bn trade deficit cut
Tensions between the US and China increased on Friday as it emerged US officials had handed Beijing a list of demands including a $200bn cut in its trade deficit and an end to state subsidies on strategic industries.

The two days of talks in Beijing between Steven Mnuchin, the US treasury secretary, and Liu He, the vice-premier, ended on Friday after weeks of escalating rhetoric between the two nations.

A statement released by the official Xinhua news agency described the talks as “frank, efficient and constructive” but added that there remained “significant disagreements over certain issues”.

A document handed to Chinese officials described the trade relationship between the two countries as “significantly imbalanced”. The US’s trade and services deficit with China was $337bn last year, according to US data, and the Trump administration is pushing for a $200bn cut in that deficit by 2020.
Hot take:

1. Trump openly talks about how he negotiates. The $200 billion target or the 2020 deadline, or both, are flexible. There will be no movement in the U.S. direction unless China thinks this time is for real. The news out of trade talks will get worse whether there is a deal or no deal down the road. It's possible there won't be a deal (real, not window dressing) until Trump walks away.

2. Assuming U.S. real GDP grows 2 percent in 2018 and 2019, it will grow ~$800 billion heading into 2020. If Trump got everything he wanted and it was fully onshored by the U.S. (Chinese exports don't shift to other nations), a trade deal would boost GDP growth by ~0.5 percent in the next two years. Who knows what China's GDP really is, but assuming it is ~12 trillion, a $200 billion swing in the trade balance would slow GDP growth by ~0.8 percent in the next two years. This is a big number, even for the huge U.S. economy, in a world where GDP growth has struggled to sustain 2 percent after 2008.

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