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Another email I just got
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Poor farmer
Posted 12/2/2018 20:01 (#7144328)
Subject: Another email I just got


Martinton,il
By Tom Orlik (Economist)
(Bloomberg Economics) -- Here’s our first take on what was
agreed at the G-20 dinner between President Donald Trump and his
Chinese counterpart Xi Jinping. This is based on an initial
statement from the U.S. side -- it’s possible important details
could change as more information becomes available:
* Ahead of the G-20, the U.S. planned to increase tariffs on
$200 billion in Chinese goods from 10% to 25%, effective Jan. 1.
That increase has now been deferred. Based on our calculations,
tariffs at 25% would have meant a 0.9 percentage point drag on
China’s GDP growth. Keeping tariffs at 10% will mean the drag
stays at 0.5 ppt. That’s a positive for China’s growth, and for
other countries in the Asian manufacturing supply chain.
* In return, China has agreed to buy a substantial amount of
agricultural, industrial and energy products from the U.S.,
aiming to narrow the bilateral trade deficit. The U.S. can
present this as a win. The cost for China is relatively low.
China has to buy its soy beans, liquefied natural gas and
airplanes from somewhere. At least until tensions ease, it will
buy more from the U.S., and less from other trade partners.
* The delay in the increase in tariffs is subject to the outcome
of 90 days of talks on intellectual property, cyber security and
other intractable issues. If those talks fail, 25% tariffs will
go into effect. Serious structural problems can’t be resolved in
such a short time. We think China will have some pre-cooked
policies that can be presented as reforms in the domestic
context, and concessions by the U.S.

Speculating on motivation, China’s growth slide and
domestic deleveraging challenge mean President Xi had a strong
incentive to reduce the impending trade drag. For the U.S.,
recent market turbulence might have given President Trump pause
for thought about higher tariffs that threatened to crimp
corporate earnings.
Looking forward, for the U.S., the extremes of total
cessation of hostilities or increased and expanded tariffs both
look unappealing. The former would be bad politics -- opening
Trump to the charge of being soft on China. The latter would be
bad economics -- coming with a blow to corporate earnings and
market confidence. Between those extremes, we’re set for a
period of protracted, but lower-level, trade tensions.
For markets, the main headwinds in 2019 were set to be
trade war and Fed tightening. The G-20 outcome reduces fears on
the former. Fed Chairman Jerome Powell’s comments that rates are
“just below” neutral lowers the temperature on the latter.
The possibility of a trade deal was trailed ahead of time
by Trump -- who said he was “very close to doing something.”
That suggests some of the good news was already priced in by
markets. The S&P 500 rose strongly in the final week of
November, partly on anticipation of positive trade news.
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