Checking In On U.S.-China Trade Talks and More

There may be a deal in sight for U.S.-China trade negotiations, but the ongoing tensions between the two global giants have potential repercussions for both Canada and the global economy.

"Negotiators have apparently made significant progress," according to Eric Lascelles, Chief Economist for RBC Global Asset Management. "However, keep in mind that non-tariff frictions are likely to persist between the two countries in the short term."

In a recent MacroMemo update, Lascelles looks at China from four different perspectives to help explain the trade issue, the relative strength of the Chinese economy and the implications of both for the global economic outlook.

A Ceasefire in the U.S.-China Trade War?

Recent trade talks have been promising, with many expecting a deal in April or early summer.

Early reports indicated that the deal would cover mainly familiar deficit-reducing remedies such as soybeans, natural gas and auto tariffs. But more recently, some of the "underlying issues" have been addressed as well, Lascelles notes.

What are some of these issues?

• The forced transfer of technology from U.S. firms to their Chinese joint venture partners
• Agreements on intellectual property matters
• The rollback of China's third round of tariffs (10 per cent on US$200 billion of goods)

There are positive signs, but Lascelles cautions that it's a complicated balance. In the short term, he says non-tariff frictions could persist between China and the U.S., including by targeting individual companies.

"The U.S. and China are likely to continue butting heads in the long run over issues such as the role of China's state-owned enterprises," he says. "Even as U.S.-China tariffs plausibly shrink, there could be an offsetting expansion of auto tariffs elsewhere."

Canada, of course, isn't immune to trade tensions with China — its second-biggest trading partner behind the U.S. Most recently, China implemented a ban on some imports of Canadian canola, citing fears of insect infestation. Around 40 per cent of Canada's canola is exported to China, according to the Canola Council of Canada.

Uncertain Economic Stimulus

China has been using a mix of monetary and fiscal stimulus to try and stabilize growth. The effects of this can be tough to gauge. "The fiscal stimulus, in particular, is hard to quantify," says Lascelles. This is in part because announcements are dribbled out, and in part because the type of stimulus is different — tilted toward tax cuts as opposed to infrastructure.

China is officially targeting a fiscal deficit of 2.8 per cent of GDP in 2019, up slightly from 2.6 per cent in 2018. According to Lascelles, this suggests 0.2 percentage points of fiscal stimulus. But the calculation is not entirely straightforward and some analysts are suggesting as high as a 2-percentage point fiscal boost, plus a further lift from monetary stimulus. If correct, Lascelles points out, this creates a much stronger case that Chinese growth may stop slowing in the second half of 2019.

Positive Numbers Emerging

After mostly negative data trends for the last six months, China has seen a positive shift in two key data points recently.

• The Caixin China Manufacturing Purchasing Managers' Index (PMI), which measures national manufacturing activity, saw an unexpected and substantial rebound
• China's aggregate social financing figure, which measures credit and liquidity in the economy, raced to a record 4.6 trillion RMB in January

However, Lascelles is concerned that these numbers may be distorted by the impact of Chinese New Year and therefore isn't yet convinced that the Chinese economy is truly bottoming.

Economic Growth Targets

Chinese policymakers have decreased the country's growth target for this year. China is now aiming for 6 per cent to 6.5 per cent growth over the next year, which is down from a 6.5 per cent target the prior year and even higher targets for previous years. Lascelles' forecast sits at the low end of that range — at 6 per cent.

"This reflects the combination of a slowing global economy, diminished Chinese competitiveness, poor Chinese demographics, slowing globalization, the lagged effect of tariffs and domestic deleveraging efforts," he says.

While China's latest stimulus efforts should not be ignored, Lascelles says there are plenty of headwinds pushing things in the opposite direction. He's keeping a close eye on things going forward.

For more background on China-U.S. trade tensions, check out Why China Matters: Friction in U.S.-China Trade Relations.