![(09 October 2019 ) DAILY MARKET BRIEF 2:A game plan for US-China trade talks (09 October 2019 ) DAILY MARKET BRIEF 2:A game plan for US-China trade talks](https://c.mql5.com/6/844/splash-730348.jpg)
(09 October 2019 ) DAILY MARKET BRIEF 2:A game plan for US-China trade talks
![Jiming Huang Jiming Huang](https://c.mql5.com/avatar/2015/11/563C54E3-36DF.jpg)
We set out our longer-term outlook for US-China trade relations applicable up to the November 2020 presidential election in our latest Global Risk Radar publication. Our base case, to which we assign a 50% probability, is for only modest progress in this round of talks. Modest progress averts further escalation while failing to resolve conflicts over intellectual property and subsidies. We assign a 35% probability to our downside scenario, in which further escalation leads toward a US recession, and a 15% probability to our upside scenario of a comprehensive trade deal.
The upcoming negotiations will help determine which of these scenarios the US and China are moving toward. We see five potential ones.
1. Talks break down: This would heighten the chances of further rounds of trade retaliation, beyond the measures already scheduled. The US could announce further increases in the average tariff on Chinese goods, more restrictions on Chinese technology firms, or measures to limit portfolio flows from US investors into China. We consider this outcome unlikely, since it would increase the threat of a US recession ahead of the 2020 presidential election, and so reduce President Trump's chances of winning a second term. But it remains a possibility, and would hurt markets.
2. Negotiations continue: The US and China fail to reach a deal but announce that talks will continue. With this outcome, we would expect the full set of tariff increases in the pipeline—including the introduction of a 15% rate on around USD 150bn of Chinese goods on 15 Dec. —to come into effect. This outcome would be a setback for economic growth, although markets could take comfort if the US and China announce a date for a next round of talks.
3. A truce is reinstated: China agrees to step up purchases of US agricultural goods and grants improved market access to certain US industries. In return, the US agrees to postpone implementing the latest round of tariff increases, pending further talks. Here the outcome would be moderately positive for markets in the short term, signaling less hostility. But the ongoing uncertainty related to the trade relationship would continue to hamper business investment.
4. An interim deal is reached: Scheduled tariff increases are suspended indefinitely, and the US could agree to roll back restrictions on Chinese technology firm Huawei. This outcome would be toward the positive end of expectations. It would also likely push markets higher.
5. A grand bargain is struck: The US agrees to roll back existing tariffs on China in return for agreement on an enforcement mechanism. We assign a 15% probability to this outcome. We note more conciliatory moves in the trade dispute have often been associated with equity or economic weakness, and we have seen signs that some of President Trump's core supporters in the 2016 election, most notably farmers, are losing patience with the trade war. We would expect this outcome to spur a more marked upswing in stocks.
By
UBS