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‘If you’re looking for good news, they didn’t cancel the trip’

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Chinese President Xi Jinping (R) and US President Donald Trump at the Great Hall of the People in Beijing on November 9, 2017.

Nicholas Asfouri | AFP | Getty Images

China and the U.S. resume trade talks Thursday in a prickly atmosphere, and strategists say the best outcome could be a postponement of the next round of tariffs but not much else.

Strategists say it’s also more likely now that the Trump administration will agree to a trimmed-down trade deal that could lift some tariffs before year-end but pushes off some of the thornier issues, such as intellectual property and technology transfers, for future talks.

The negotiations are the first high-level talks in two months and come as other issues have been bubbling up in the increasingly tense relations between the U.S. and China. China is retaliating against the National Basketball Association by cutting back on its preseason tour and canceling broadcasts in China, after a Houston Rockets executive tweeted support for Hong Kong protesters.

The U.S. this week also blacklisted 28 Chinese companies, due to alleged human rights violations against Muslim minorities in China’s far-western region of Xinjiang. The list includes some of China’s next-generation companies involved in artificial intelligence and machine thinking. The U.S. had previously blacklisted Chinese telecom company Huawei for claims of cyber espionage.

“If you’re looking for good news, they didn’t cancel the trip,” said Tom Block, Fundstrat Washington policy strategist.

Partial deal?

Chinese negotiators are reportedly open to negotiating a partial trade deal with the U.S., but it is unlikely to be reached this week, according to Bloomberg News, which was quoting an unnamed official with direct knowledge of the talks. According to the Financial Times, Chinese officials are offering to buy more U.S. agricultural goods, in a show of goodwill, raising soybean purchases to 30 million tons, from 20 million.

“I think the probability of a deal in the next week is low, but I think some time in November, early December we do get a smaller deal that extends buying power for Huawei and some concessions from China in terms of purchasing soybeans and pork, some very small things,” said Ethan Harris, Bank of America Merrill Lynch head of global economics.

Strategists say the impeachment proceedings against the president may make Chinese negotiators believe President Donald Trump needs a victory at home, but they say the election could be an even bigger catalyst for both the White House and China. Sen. Elizabeth Warren, a surging Democratic candidate who now leads in some polls, is an unknown and if elected she may be even tougher on China on human rights and other issues than Trump.

But there is also a view that China may want to wait out the election to see who will be seated across the negotiating table. As for Trump, it is widely expected he will seek a deal before the election.

“The president’s approval rating is highly correlated to the probability of a China deal coming,” said Dan Clifton, head of policy research at Strategas.

Clifton said a deal may be reached soon that will not be as comprehensive as the White House has been looking for. The slimmed-down deal would likely be presented as a first step.

“What’s changed is the tariffs that were ratcheted up in May have started to really inflict pain on both sides,” said Clifton.

Tariff delay?

The strategist said it’s likely the tariffs scheduled for Oct. 15 would be delayed. If not stopped, the tariffs on industrial goods would rise to 30% from 25%. “That means the supply chain will accelerate out [of China] faster,” said Clifton. “That’s what they’ve come here for — to get that delayed.”

There are also tariffs that have been put on hold until December. Those are the first tariffs that would directly hit consumer goods and were announced by Trump as negotiators last met.

Trump has said he does not want a partial deal with China, but Clifton said there’s the possibility that a sweetener could be thrown in to a trimmed-down deal that would make it more appealing. “What you’ve seen is Larry Kudlow discussing in the last couple of days is if they agree to open up foreign ownership so U.S. companies don’t have to be 51% owned by a Chinese company. That would go a long way towards protection of intellectual property rights,” he said.

Kudlow, White House economic adviser, is not part of the talks that are set to take place in Washington between Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Thursday and Friday.

Distrust

Strategists say as the relationship between the two countries has become more strained, it’s less likely a comprehensive deal can be agreed on. Both sides have become more distrustful of the other, and the environment ahead of the talks is rife with negative headlines and badgering.

Ian Bremmer, Eurasia Group president, said his Washington sources are not optimistic for a breakthrough and, on the Chinese side, President Xi Jinping no longer trusts Trump. “He expended a fair amount of political capital trying to work this out with Trump, specifically at the bilateral talks at G-20,” said Bremmer, adding Xi may see the president as too erratic. “Trump is not going to be trusted by him.”

Harris said Trump’s handling of Mexico also damaged his credibility. After agreeing to a new trade deal with Mexico and Canada, Trump threatened in June to put tariffs on Mexican goods over immigration issues, unrelated to trade.

“The idea that a trade deal doesn’t mean no more tariffs was quite a powerful message to China,” he said.

“I think the trust between the two sides has deteriorated dramatically here,” said Harris.

He said he expects a “skinny” deal. “The question is how skinny is it?” he said. “The problem is neither side wants to give up anything easily, and they don’t trust each other. The trust is a big deal, but it isn’t just the trust, the gap has grown because the tariffs have gotten bigger and bigger over time. Rolling them back has become a bigger deal.”

Harris said he doesn’t expect the impeachment process to have an impact on the talks, unless Trump is removed from office.

“China’s got very limited goals in the short run. They want to keep Huawei’s access to U.S. imports so the company can compete in global markets. That’s important to China. Beyond that, I don’t think they have much they’re looking for. … They’re very reluctant to do a comprehensive deal. They don’t know if any deal will stick. They look at the experience of the summer: They were close to a deal, and it didn’t happen,” he said.

The U.S. has granted temporary exemptions for Huawei suppliers.

Block said the U.S. move to blacklist Chinese companies this week could hamper even limited progress. “Before this announcement I think people thought, at a minimum, they could keep on talking and have a temporary standstill like they’ve done in the past. … That’s now in doubt,” he said. Block said he does expect a more comprehensive deal, just because the two economies are so important to each other, but it will not be any time soon.

Harris said a big concern is how the administration treats Huawei and whether it extends the exemptions on U.S. imports.

“That would be a really big move, taking a bellwether company in China and basically killing their global business. It’s a very big escalation because unlike a tariff, it’s a ban,” said Harris.

If the U.S. does not extend exemptions, it would be a significant event, raising questions about which companies would be next. “That would be breaking new significant ground. That’s an event that could be market moving. This is more like two kids in a sandbox throwing stuff at each other,” he said.

Strategists say tensions around the trade talks have intensified because of disagreement on other issues and China does not want to see interference or criticism for what it sees as its internal affairs.

“I think the whole negotiations have become much more complex because of Trump saying China should investigate Biden,” Harris said. “It becomes more complicated because of the Hong Kong escalation. Things were already getting more difficult over the summer with the escalation of the trade war. … The negotiations have gotten very messy.”

“It’s a lot harder to do a real deal than it was,” he said. “The expectations for me have been dramatically reduced for what’s a doable deal.”

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I’m sorry for election defeat

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Opposition Labour party leader Jeremy Corbyn leaves his house in north London on January 16, 2019.

DANIEL LEAL-OLIVAS | AFP | Getty Images

Labour Party leader Jeremy Corbyn apologized Sunday for this party’s crushing defeat in the British general election but defended his campaign, which failed to resonate with the party’s working-class base, as “one of hope rather than fear.”

British Prime Minister Boris Johnson’s Conservative Party won 365 of the 650 seats in the House of Commons in Thursday’s landslide election. Labour took 203 seats, its worst total since 1935.

“I’m sorry that we came up short and I take my responsibility for it,” Corbyn wrote in a letter published in the left-leaning Sunday Mirror newspaper.

Corbyn, who has faced fierce criticism from within his own party in the aftermath of the electoral carnage, has said he will step down as Labour leader after a “period of reflection.” The process of choosing a replacement will begin early next year, but some have called for Corbyn’s immediate resignation.

“I remain proud of the campaign we fought. I’m proud that no matter how low our opponents went, we refused to join them in the gutter,” Corbyn wrote. “And I’m proud that our message was one of hope, rather than fear.”

Corbyn’s policies failed to energize voters weary of more than three years of political wrangling over Britain’s divorce from the European Union. Johnson’s campaign, meanwhile, revolved around three words: His pledge to “get Brexit done.”

Britain is scheduled to leave the EU on Jan. 31.

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Boris Johnson can turn his victory into history if he can save the UK from division

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Prime Minister Boris Johnson leaves Downing Street for Buckingham Palace where he will seek permission to form the next government during an audience with Queen Elizabeth II at Downing Street on December 13, 2019 in London, England.

Dan Kitwood | Getty Images News | Getty Images

It is just the sort of script one might expect from Boris Johnson, one of the most enigmatically fascinating personalities of our times.

Prime Minister Johnson – who famously craves both public attention and a place in history – won the former and a shot at the latter through a British election victory this week that was the most convincing conservative victory since Margaret Thatcher in 1987. To save the United Kingdom itself, however, he must reverse course, or at least amend direction, on much of what he has said and done to win in the first place.

I opposed Brexit on economic and political grounds yet, at the same time, Johnson might have the political flexibility, the intellectual chops and the Churchillian ambition to confound his critics along the five lines of action he must simultaneously pursue to find his historic place.

  • Most importantly, he’ll have to negotiate a “no-tariffs, no-quotas” trade deal by end-2020 with a European Union that he has disparaged, knowing that it by some distance is the U.K.’s major trade partner.
  • Second, he will have to rapidly restore external economic confidence in a country that has been suffering disinvestment, an economic slowdown, and doubts about its continued role as a European and global financial hub.
  • Third, he should still aspire to get a trade and investment deal with an impeachment-distracted President Trump. At the same time, he should share with voters how unlikely that will be and embrace what might be faster and easier opportunities in Asia, namely negotiating his way into the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
  • Fourth, he’ll have to abandon much of the populist rhetoric that got him elected and embrace his encouraging “One Nation” message of this week that could heal the country’s divisions – and perhaps also slow a European-wide and global populist trend.
  • Finally, he’ll need save the United Kingdom from unraveling by convincing Scotland and Northern Ireland of their future place – while heading off another Scottish independence referendum. A successful EU negotiation will help that.

Media pundits in recent months have compared and associated the rise of Boris Johnson and Donald Trump as populists who have turned their countries’ politics upside down. Yet the comparisons only go so far, given Boris’ bookish, multilingual, multicultural background and intellectual passion.

He was born in Manhattan as Alexander, then raised in Brussels until age 11, before being shipped to British boarding a year after his mother’s breakdown, a life richly chronicled by Tom McTague in The Atlantic last July. Somewhere along the way the quiet child became the boisterous, eccentric British Boris. He developed a comic demeanor, a disheveled mean (and mane), a rapier intellect with a taste for the classics, and an insatiable desire to be liked.

From all of this grew his self-proclaimed ambition to be “world king.”

“I often thought that the idea of being world king,” said his mother of her illness’ impact on Boris, “was a wish to make him unhurtable, invincible somehow, safe from the pains of life, the pains of your mother disappearing for eight months, the pains of your parents splitting up.” The biographer Sonia Purnell says Johnson told girlfriends that his way of coping was to make himself invulnerable “so that he would never experience such pain again.”

The Brexit referendum and— three years later— his election vote are part psychological and part political drama for Boris Johnson, the stuff of a West End musical. His Friday speech on the steps of 10 Downing Street showed how quickly he can change his tune from that of the campaign to one of governance.

Speaking to those voters who opposed him and wished to remain in the EU, he said, “I want you to know that we in this One Nation Conservative government will never ignore your good and positive feelings – of warmth and sympathy toward the other nations of Europe.”

He went further.

“As we work together with the EU as friends and sovereign equals in tackling climate change and terrorism, in building academic and scientific cooperation, redoubling our trading relationship…,” he said, “I urge everyone to find closure and let the healing begin.”

If the U.K.’s economy emerges as robust and healthy, other European countries might wonder about the value of staying in.

That will be easier said than done as Johnson will now have to decide what kind of U.K. he wishes to build – one more akin to its neighbors in the EU or one more resembling a low-tax, deregulated Singapore-on-Thames.

“Brexit will formally happen next month, to much fanfare,” writes the Economist, “but the hardest arguments, about whether to forgo market access for the ability to deregulate, have not begun. Mr. Johnson will either have to face down his own Brexit ultras or hammer the economy with a minimal EU deal.”

French President Emmanuel Macron, enamored by his colleague’s intellect and linguistic skill, has called Boris Johnson “a leader with genuine strategic vision” who should be taken seriously. This week he extended an olive branch while in Brussels, telling “British friends and allies something very simple: by this general election, you confirmed the choice made more than three years ago, but you are not leaving Europe.”

On the other hand, he has warned, the best way to reach the most ambitious trade agreement with the EU would be if the U.K. essentially says “we don’t want to change very much.”

So, the drama will continue. If the U.K.’s economy emerges as robust and healthy, other European countries might wonder about the value of staying in. If Johnson defines his country as too close to the European Union, irrespective of economic logic, his base may well ask what the past three years’ drama has achieved other than serving Johnson’s own political ambitions.

It’s time to raise the curtain on the next act.

Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.



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‘Historic’ deal with China will be good for global growth: Steven Mnuchin

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Treasury Secretary Steven Mnuchin speaks to the news media after giving a television interview at the White House in Washington, December 3, 2018.

Leah Millis | Reuters

The “historic” phase one trade agreement reached Friday between the U.S. and China will boost global growth, according to U.S. Treasury Secretary Steven Mnuchin.

Speaking to CNBC’s Hadley Gamble at the Doha Forum on Saturday, Mnuchin said the partial deal would address a host of issues central to Washington’s trade agenda.

“This deals with intellectual property, this deals with technology transfer, it deals with structural agricultural issues, financial services are opening up, currency understandings, as well as a commitment to purchase U.S. agriculture and U.S. goods,” he said.

Mnuchin also dismissed the notion that the U.S. was pushing back on the rules-based trading system, arguing that a level playing field with China would benefit the global economy.

“For a very long period of time the U.S. was open to China, China was not open to the U.S. There were very strong restrictions and for the first and second largest economy in the world, there should be more trading back and forth and that’s what we’ve been working on, and I think these agreements will not only be good for the U.S., but will be very good for global growth,” he added.

Global stocks surged Friday as Washington and Beijing announced that the partial accord had been reached, averting the next round of U.S. tariffs after a bruising 18-month trade war.

U.S. and Chinese negotiators will now work toward setting a timescale to sign the agreement, which is still subject to legal procedures, with U.S. Trade Representative Robert Lighthizer telling reporters Friday that the two sides would aim to ink the deal in January in Washington.

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