Negotiators from China will arrive in Washington D.C. this week for another round of trade talks. The Chinese delegation will be led by Vice Premier Liu He (President Xi will not be present). The US is scheduled to raise tariffs from 25% to 30% for $250 billion of Chinese goods on October 15. Ahead of the meetings, Liu is already taking industrial policy and government subsidies off the negotiating table. The prevention of forced technology transfers and intellectual property (IP) theft is a core demand from the Trump administration that must be included in any trade deal. China limiting the scope of possible concessions excluding a core US demand is not likely to improve chances of a trade deal.
The US Trade Representative estimates that Chinese IP theft costs American companies between $225 – $600 billion annually. Ending “foreign trade abuses” was a key point for Trump’s 2016 campaign pledge. If the past two years of the US-China trade war have told us anything, it’s that Trump is willing to stake his entire political career on seeing it through. China would welcome a change in administration no later than 2021 and is content to delay and extend the negotiating process. In the meantime, producers and consumers from both sides are stuck in the middle. Tariffs from both sides for all goods between the US and China are becoming the status quo, with no hints of changing anytime soon.
The World Trade Organization (WTO) ruled on a US request to tariff European goods as a result of an ongoing trade dispute from 2004 regarding illegal subsidies for European Airbus planes. If the WTO adopts the ruling, the US would be granted supranational approval to tariff $7.5 billion European goods. The EU could retaliate by early 2020 when the WTO decides retaliation rights against illegal subsidies for US Boeing planes. The Trump administration has not shied away from trade disputes with China, Mexico, and many others. Europe could be the next target as this one serendipitously falls into his lap. Concerns for markets would be a Trump escalation targeting up to ~$487 billion of total European goods imported to the US.
The PMI manufacturing index showed minimal growth. The ISM manufacturing and non-manufacturing indices showed a further slowing in growth, with exports down sharply for the past three months. Construction spending is down 1.9% year over year; although negative, it is still the most optimistic figure since April. Labor remains stable with the unemployment rate ticking down to 3.5% and the labor force participation rate holding steady at 63.2%. However, manufacturing jobs were a net loss and wage pressures remain subdued.
This week will see multiple speeches from Fed Chair Powell along with the minutes from the last Fed meeting, CPI and PPI inflation measures, JOLTS job openings, and consumer sentiment.
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