With new rounds of Sino-US trade negotiations underway, the atmosphere for the meetings seems to have improved.
We see three potential outcomes:
- China and the US agree by March 2019 (when the tariff truce is due to expire) to settle all major issues and tariffs are rolled back (10% probability)
- Trade talks stall or are derailed; the 10% tariff on the USD 200 billion of Chinese exports to the US rises to 25% and President Trump threatens to levy 25% tariffs on all imports from China (20% probability)
- Negotiations continue beyond March with no further tariff escalation (70% probability).
On the Chinese side
China is accelerating its opening-up and reform processes. In recent months, the Chinese authorities have approved significant investment deals, allowing several multinational corporations to set up wholly-owned factories in China or acquire majority (75%) stakes in their Chinese JV partners. Recent policy action suggests that the government wants to be seen not to be delaying or reneging on promises to further open up markets to overseas investors. For example, while rules that will allow foreign life insurers to own majority stakes in their China ventures have yet to be finalised, negotiations for such approvals have gone ahead.
This could indicate that China has finally understood the ‘promise fatigue’ among foreign investors and is trying to correct the problem. The recent moves complement other measures to address US complaints about China’s protective behaviour. They should help to improve the atmosphere at the trade negotiations.