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Hopes for a deal dwindle as US, China prepare for latest round of trade talks

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Hopes for a deal dwindle as US, China prepare for latest round of trade talks

The U.S. and China are about to kick off their latest round of trade talks, but a recent bout of political complications and heightened rhetoric could stymie any chances of a deal.

China's Vice Premier Liu He is slated to begin talks with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin Oct. 10 in Washington, marking the 13th round of talks in the ongoing trade spat. If those talks go well, the Chinese Vice Premier may meet with President Donald Trump on Oct. 11, just days before the U.S. is due to hike tariffs on billions of Chinese imports and months ahead of new tariffs on billions more in goods.

But new and continued controversies have surrounded the lead-up to this round of talks.

A cancellation by China to visit U.S. farms in September, a pro-Hong Kong comment by the general manager of the Houston Rockets professional basketball team and recent comments by Trump indicating that any "bad" moves by China in its ordeal with Hong Kong protesters would harm trade talks with Washington all muddy the mood as negotiators attempt to inch closer to any sort of partial resolution to the year-plus-long trade war.

On top of that, the U.S. this week imposed visa restrictions on Chinese officials this week for the persecution of the Uighur people, and the Commerce Department on Oct. 7 also blacklisted 28 Chinese artificial intelligence companies and other entities, similar to its move against Huawei Culture Co. Ltd. in May.

Peter Allgeier, president of consulting firm Nauset Global LLC and a former Deputy U.S. Trade Representative under the Bush and Obama administrations, said in an interview that he does not see a resolution of the serious problems with China in the near term, including major subsidies to state enterprises, forced technology transfer, intellectual property theft and discriminatory regulatory practices.

Allgeier believes that Xi is not prepared to implement a radical reordering of the Chinese economy, but could be willing to make a transnational agreement of commodity purchase commitments in return for tariff relief, betting that Trump will want to have some sort of deal with China ahead of the 2020 presidential election.

"The question is, What package of purchase promises and vague reform measures by China will allow President Trump to claim success? I don't think we're there yet," Allgeier said.

If the two countries fail to make sufficient progress on talks, the Trump administration could forge ahead with a tariff rate increase to 30% from the current 25% rate on $250 billion of Chinese goods, slated to go into effect Oct. 15. That would apply to goods including chemicals, textiles, meat, fish and types of furniture.

After that would come another round of U.S. tariffs on approximately $160 billion of Chinese products set to go into effect Dec. 15, which would apply to a bevy of consumer goods.

Beijing will offer to increase annual purchases of U.S. agricultural goods in an effort to avoid the implementation of the Oct. 15 round of tariffs, The Financial Times reported Oct. 9

Though that agricultural purchase would be welcome for Trump, who has sought increased U.S. farm good shipments, it does not address the impasse over structural issues, including Chinese forced technology transfer and intellectual property rights infractions at the heart of the spat.

U.S. markets were gaining in afternoon trade, signaling optimism about a potential deal with China. The Dow Jones Industrial Average was up 194.16 points to 26,358.23 as of 1:42 p.m. ET, while the S&P 500 was up 26.29 points to 2,919.35.

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That is why Raoul Leering, head of international trade analysis for ING Economics, said the best obtainable result for this round of talks would be not only to secure such a farm purchase commitment but also to stave off the U.S. tariff tranches of Oct. 15 and Dec. 15.

Trump's unwillingness for a mini deal and U.S. plans to limit funding of Chinese companies through U.S. capital markets leave tensions too high, Leering said in an interview, all but ruling out a full deal.

Similarly, Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a note that the financial services firm is not anticipating any breakthroughs from this round of talks.

Rocky few months

This round follows a tumultuous several months of breakdowns in talks and tariff impositions by both sides, most recently with the Trump administration's decision to forge ahead with tariffs on $300 billion of imports from China.

On Sept. 20, the Chinese delegation canceled a scheduled visit with U.S. farmers in Montana. The U.S. Department of Agriculture had characterized the visit as a way to bridge a gap between China and the U.S. farm industry. The cancellation overshadowed two days of low-level negotiations between the two countries that week, although the USTR's Office called the meetings "productive."

Chris Rogers, a research analyst at Panjiva, said signs of a de-escalation in the trade spat may be fading due in part to the public statement from the U.S. and Trump's reiteration that he is not interested in a partial deal.

Trump did not mince words at the United Nations General Assembly Sept. 24, telling leaders of the world that Beijing has not abided by its commitments since its ascension to the World Trade Organization in 2001.

Doug Barry, a spokesman for the U.S.-China Business Council, said the trade group is "cautiously optimistic" that progress will be made in October's talks, due in part to China's agreement to purchase U.S. farm goods and has backed off threats to impose additional tariffs on U.S. exports.

"Pressure is building on both sides to make a deal," Barry said. "So the stage is set for progress, but the performers seem to have an endless supply of surprise endings."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.