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Moody's: China unlikely to meet US demands on trade

China is not likely to meet demands that it reduce its trade surplus with the U.S. by $200 billion over two years because such a move would be incompatible with Beijing's policy objectives, according to Moody's Investors Service.

The rating agency believes that meeting the U.S. demand would require "implausibly large" adjustments to trade flows for China, reversing flows that have built up over the past 10 to 15 years.

"Such a rapid shift generally involves a very sharp slowdown in GDP growth and imports by the deficit country, which is not the objective pursued by the U.S.," according to Moody's.

The implied adjustment of around $70 billion per year in the trade surplus from 2018 to 2020 will be substantial. This cut can be achieved by reducing Chinese exports by around 15% annually to the U.S., or by expanding Chinese imports from the U.S. by more than 27% a year.

By way of comparison, Chinese exports to the U.S. increased by 3.6%, and imports from the U.S. rose by 5.2% on average in the past five years.

Making such a significant swing in trade flows would contradict China's current industrial policy which aims to boost innovation and add value to the economy.

Meanwhile, the U.S. has also reportedly requested that Beijing immediately end subsidies linked to its "Made in China 2025" industrial policy, reduce tariffs to match those of the U.S., remove investment restrictions and strengthen intellectual property protections and enforcement, along with reducing the trade surplus.

Moody's expects the U.S. and China's demands to evolve as trade negotiations continue. However, prolonged uncertainty regarding these issues could negatively impact investment and growth in both countries, the rating agency added.