The latest round of trade negotiations between China and the United States will begin later this week. Both nations have been locked in a bitter trade war for more than a year, with significant tariffs applied on both sides.
Investors hoping for an end to the tensions may have some time to wait, especially if the latest report turns out to be true. It emerged over the weekend that China is unwilling to compromise on two key demands made by the White House.
The Points of Contention That China Won’t Talk About
According to reports from Bloomberg, Fox, and other major networks, China won’t negotiate on its subsidization of hi-tech industries or commit to any reform of its industrial policy.
These two points are major issues that Trump and his administration want to see addressed. From the American side, it has been argued that China’s subsidization and close control of its manufacturing sector creates an environment of unfair competition.
In addition to lower labor costs, China’s pro-manufacturing policies have kept it incredibly competitive in recent decades, especially when it comes to technology products.
- Chinese semiconductor manufacturers can receive two years of tax-free operation followed by a 50% tax reduction for three years.
- Manufacturers who produce chips below 9 nanometers are awarded five years of tax-free operation, followed by a 50% reduction for another five years.
- The state-owned China Development Bank runs a special fund for the semiconductor manufacturing industry, investing billions into production, research, and development.
- The government plans and oversees the manufacturing sector through official policy.
All of this is inconsistent with a free market environment.
What Will This Mean for Negotiations Moving Forward?
President Trump himself has criticized China for altering key areas of a proposed deal. This latest news suggests that China won’t just alter some points, but it will stop talking about them altogether.
This could make it extremely difficult for U.S. negotiators to finalize a favorable trade deal. There’s risk that a deal won’t be signed before the next Presidential election.
Treasury yields are stronger going into this week. However, there could be some negative days in stocks until we learn more by the close of markets on Friday.
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