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U.S. And China Could Close ‘Mini Trade Deal’

Nick Cunningham

The U.S. and China are scrambling to ease tensions in an effort to head off another escalation in the trade war, a sign that both sides are feeling the pain.

Over the last week, both Washington and Beijing offered gestures of good will, delaying tariffs and exempting certain products from those levies. China announced a delay in tariffs; President Trump responded by pushing off planned tariffs by two weeks.

On Thursday, China said not only would it exempt U.S. soybeans, pork and other agricultural products from the latest tariffs, but some Chinese companies also moved to buy 10 shipments of American soybeans, according to Reuters. That amounted to the largest purchase of U.S. soybeans from private Chinese companies in more than a year, Reuters noted.

The easing of trade tensions helped to boost U.S. agricultural prices, which will be highly welcomed news to American farmers. Soybean prices jumped by 3 percent on the news.

All of these moves may not amount to much since existing tariffs remain in place, but they can be viewed as confidence-building measures. “The recent soybean purchases by China could form a good basis for the new trade talks,” Commerzbank said in a note.

Crucially, for President Trump, he is trying to repair his relationship with farm country, after angering them over the trade war as well as from policies that have damaged ethanol markets.

In fact, as Politico reports, advisers on Trump’s team are desperate to find an “escape hatch” from the planned increase in tariffs in both October and December. The economic toll heading into the 2020 election is political threat to the president’s reelection.

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In a separate report, Bloomberg said that Trump officials are considering an “interim deal” that delays planned tariffs. When asked about such a proposal, Trump did not dismiss it. “A lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first,” Trump said late Thursday. “But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider.”

It’s not clear what that might look like in practice, but it could amount to a status quo – existing tariffs remain in place, but the scheduled increases are scrapped. For its part, Beijing is hoping to separate trade talks from more contentious national security issues, according to the Wall Street Journal. That could smooth the way to an agreement on easing trade tensions at least.

Rapidan Energy suggests that the “mini deal” is possible, one that likely would consist of Chinese purchases of U.S. commodities and pledges to protect U.S. intellectual property, in exchange for tariff relief. That is likely the best case scenario as a true “grand bargain” remains “highly unlikely,” the consultancy says.

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Any deterioration in the standoff between Beijing and Hong Kong could scuttle the mini deal, but the two sides are inching closer to a modest agreement. “President Trump’s two-week tariff delay announced last night indicates a mini deal is coming together, but he wants to be master of ceremonies when it’s announced,” Rapidan Energy wrote in a note.

For now, commodity speculators remain pessimistic about the trajectory of the trade war. “We think the constancy of the [money-manager positioning indices] for trade-war-sensitive commodities implies that there is a large amount of speculative positioning in commodities placed on the view that the US-China trade war will get significantly worse,” Standard Chartered wrote in a report. “We think that most investors have already positioned their commodity portfolios according to their view on that binary issue. Until the trade war significantly deepens or ameliorates, those positions are likely to be entrenched.”

Oil markets eagerly await the next twist and turn in this long running saga. While a grand bargain appears unlikely, even a suspension of scheduled tariffs would be welcomed.

By Nick Cunningham of Oilprice.com

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