So far there are two very different answers.
One camp sees the deal between Trump and European Commission President Jean-Claude Juncker to suspend new tariffs while negotiating over trade as a deliberate attempt to mend fences with allies as the U.S. girds for a protracted dispute with China.
“De-escalating the U.S.-EU trade track, and possibly the NAFTA trade track in the period ahead, does not mean the U.S.-China trade track is also ripe for an off-ramp,” Krishna Guha, vice chairman at Evercore ISI, wrote in a note. “This is possible, but it is at least as likely that the U.S. is reducing trade tension with its allies in order to improve its leverage and staying power in what we continue to fear will be a prolonged trial of strength with Beijing.”
Guha says Evercore ISI’s base case is there’ll be no U.S.-China deal before 2019.
The U.S. truce with Europe is likely to embolden Trump to increase his pressure on China, said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte in Singapore.
“Trump will likely blow his trumpet and argue that his trade war threats are working,” Chua said. “The probability of a full-blown U.S.-China trade war has ironically increased with the U.S.-EU trade deal.”
The other view: Trump’s apparent deal with Europe shows how bargains can be struck.
“The willingness of Trump to agree to a trade truce with the EU is a positive sign that a similar arrangement could be reached during a discussion with Xi Jinping,” said Andy Rothman, a former U.S. diplomat in Beijing who’s now an investment strategist at Matthews Asia, a money manager. “I also think that Xi is better placed to make more concessions than Juncker was able to offer, and thus obtain more concrete results from Trump.”
That’s because of Xi’s position as the sole leader of his country and his pledge to make China’s economy increasingly market-oriented, said Rothman.
One thing all analysts can probably agree on — don’t count your trade truce chickens just yet.
“We should be cautious,” said Deborah Elms, executive director of the Asian Trade Centre, a consulting firm in Singapore. “The EU got promises to start talking. China also received similar treatment. After two dialogue sessions, China ended up facing $50 billion in tariffs with potentially more on the way.”
Trump has already imposed 25 percent tariffs on $34 billion of imported Chinese goods — triggering retaliation from Beijing — with another $16 billion likely to be targeted soon. At the same time, the Office of U.S. Trade Representative has identified an additional $200 billion of Chinese goods slated for a 10 percent duty and Trump has threatened to target as much as $500 billion worth — roughly the value of China’s annual goods exports to the U.S.
While there appears to be little sign of negotiation between the U.S. and China, the situation remains fluid. Trump has surprised before by pushing ahead with tariffs even after Treasury Secretary Steven Mnuchin in May declared the trade war was “on hold.” Trump also lifted a ban on American firms selling products to Chinese telecommunications equipment maker ZTE Corp. and opted for a softer tack on new rules scrutinizing Chinese investment.
While Chinese officials remain open to a deal, they are unsure about trusting their American counterparts, Bloomberg News has reported.
For now, the mood among analysts suggests that optimism for a breakthrough in the U.S. and China tensions is low. Goldman Sachs Group Inc. economists led by Jan Hatzius are among them.
“Overall, we do not believe that recent positive developments regarding U.S.-EU trade should be interpreted as a reduction in risk in the other major trade dispute, with China. In fact, they likely mean the opposite,” the Goldman economists wrote.
The effect of that trade war on China’s growth may also be limited so far, according to a separate Goldman Sachs report. The yuan’s recent tumble on a trade-weighted basis will offset the drag on Chinese growth from the first two rounds of U.S. tariffs, according to the report.
— With assistance by Reinie Booysen
(Updates with Goldman Sachs response from 16th paragraph.)