Rabobank: There Won’t Be A Trade Deal Breakthrough As China Would Have To Change Its Entire Economic Model

Submitted by Michael Every of Rabobank

US stocks ended Friday’s session on the back foot after President Trump said that reaching a deal with China is not a priority ahead of the 2020 presidential election. Trump said he was not interested in “a partial deal”. He also claimed that the dispute will not undermine his chances to get re-elected (something that Beijing is most likely hoping for) and that his goal is a “complete deal” with China.

Talks between US and Chinese officials held last week were “productive”, according to an official statement published by the US Trade Representative’s office. The main focus was on agriculture. The US wants China to significantly increase purchases of soybeans and other agricultural products. However, yet another pledge from Beijing to buy more soybeans is unlikely to prove sufficient to reach a deal.

To our mind remarks from Trump imply that he expects China to address other crucial issues: intellectual property theft, barriers to entry for foreign companies and generous subsidies for state companies. We remain sceptical about a major breakthrough in the trade war in the coming months. China would have to change its economic model to address those issues – something that Beijing is not prepared to do.

Trump’s positive assessment of the US economy is one of the reasons why he does not seem to be under pressure to get a deal. He would have been far less confident if he read reports published by our Philip Marey, who expects a recession in the US next year. If he learnt that Philip nailed it anticipating last year that the Fed will be cutting rates in 2019, maybe he would have invited him to the White House for a chat. Meanwhile, Trump’s chief economic adviser Kudlow remains optimistic about the prospects for the US economy. The S&P 500 Index – one of the key barometers for Trump – continues to trade close to the all-time high. Perhaps if there is a “major” sell-off in excess of at least 10%, Trump will adopt a different approach.

While Trump continues to claim that the pressure is not on him but on China, the US actually excluded a wide range of products from tariffs in response to requests from US companies, which warned that such levies would cause economic issues. Winning a trade war may not be as easy as Trump claims. We will find out more next month when Chinese Vice Premier Liu He plans to visit Washington to meet US Trade Representative Lighthizer and Treasury Secretary Mnuchin for high level negotiations, Bloomberg reported.

The US opted for a relatively measured response to attacks on the world’s largest oil-processing facility in Saudi Arabia opting to send more troops and weapons to the Kingdom instead of a full-scale military action. Iranian President Rouhani, whose country has been accused for the drone attacks, has warned American and other foreign forces to “stay away” from the region saying that the presence of such troops in the Gulf has always brought “pain and misery.”

President Trump said he doesn’t plan to meet his Iranian counterpart Rouhani at the United Nations General Assembly on Tuesday where the latest developments in Saudi Arabia are likely to be discussed. That said, he also added that it “doesn’t mean it doesn’t happen” as he is a “very flexible person.” 

While a full scale military confrontation has been avoided, inflammatory rhetoric from all sides involved means that news headlines will continue to drive oil prices leaving oil importers the most vulnerable – especially emerging countries such as India, South African and Turkey – to a sudden spike in prices. Reportedly it could take months – rather than maximum 10 weeks promised by Aramco’s executives –to restore production to the pre-attack level. Brent crude continues to trade well above the September 13 close before the attacks took place.

Source Article from http://feedproxy.google.com/~r/zerohedge/feed/~3/10Su7opzzYw/rabobank-there-wont-be-trade-deal-breakthrough-china-would-have-change-its-entire-economic

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