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Mnuchin's Deadlocked China Trade Talks Hang Over Pivotal G-20

Mnuchin's Deadlocked China Trade Talks Hang Over Pivotal G-20

U.S. Treasury Secretary Steven Mnuchin this weekend will have his first chance to break an impasse in a deepening trade war with China -- if officials from the two countries decide they want to jump-start talks at an international summit in Japan.

Mnuchin is set to meet Chinese central bank Governor Yi Gang during a gathering of G-20 finance ministers from June 7 to 9 in Fukuoka, according to a Treasury department statement on Tuesday.

Even a casual chat between officials of the world’s two largest economies could lay important groundwork for a meeting between Presidents Donald Trump and Xi Jinping, who will be in Japan at the end of the month for the G-20 leaders’ summit. Since trade talks broke off last month, the two countries have escalated their trade war and exchanged increasingly belligerent accusations about who’s to blame for the stalemate.

“Any evidence of Mnuchin talking trade or any evidence of a constructive dialog taking place is going to be encouraging, but at this point it is difficult to see how the two sides will de-escalate” unless planned tariffs are scrapped or at least delayed, said James Lucier, managing director of Washington-based Capital Alpha Partners, a policy research firm for investors.

Opportunities to Talk

In addition to the one-on-one meeting with Yi, Mnuchin and Liu Kun, China’s finance minister, will participate in a panel discussion about tax policy early Saturday, alongside four other counterparts. Yi has attended some trade talks with the U.S., though he is not considered Beijing’s lead negotiator on the matter.

The two nations hit an impasse in May after months of intense talks, prompting another round of tit-for-tat trade tariffs. Trump last month raised tariffs on $200 billion of Chinese goods to 25% from 10%. The Chinese responded with countermeasures.

The Trump administration is now seeking to choke off Beijing’s access to key technologies by limiting the sale of vital American components to China’s Huawei Technologies Co., citing national security concerns, and weighing putting at least five Chinese surveillance companies on the same blacklist.

Rare Earths

China blames the U.S. for the breakdown in the trade talks, accusing it of unreasonable demands. The country has hinted at cutting off the U.S. supply of rare earth elements and its state media is blasting American policies in nationalistic terms.

The U.S. on Monday said it was “disappointed” China was misrepresenting the nature of the talks. “Our insistence on detailed and enforceable commitments from the Chinese in no way constitutes a threat to Chinese sovereignty,” the U.S. Treasury Department and Trade Representative said in a June 3 statement.

The stalemate in U.S.-China trade talks helped send American stocks to their first month in the red this year, with the S&P 500 Index losing 6.6% in May. Losses spiraled further after Trump announced last week that Mexico could face tariffs over immigration.

‘Permanent’ Conflict

“We could be in a permanent state of trade conflict with China,” said Michael Feroli, chief economist for JPMorgan Chase & Co.

To cope, investors have been flocking to safer assets. Bonds rallied in May, sending 10-year Treasury yields falling at the fastest pace since 2016.

Trump and Xi’s teams have held nearly a dozen rounds of trade meetings, but a deal has remained elusive. At the beginning of May, the two nations considered announcing a signing ceremony, according to Mnuchin, before talks broke down.

While the trade war has unnerved investors, U.S. economic growth has continued. The unemployment rate is the lowest since 1969 and so far inflation data shows that consumers have not felt pressure from rising prices.

But global manufacturing last month, a key recession indicator, was the weakest since 2012, with softness in Germany, Japan and the U.K., according to a report by IHS Markit. The U.S. had its lowest result in a decade.

Federal Reserve Chairman Jerome Powell on Tuesday signaled an openness to cut interest rates if necessary, pledging to keep a close watch on fallout from the deepening disputes between the U.S. and its largest trading partners.

The trade war is throwing “global supply chains into question and contributes further to the uncertainty already weighing down business investment,” said Jonathan Millar, senior U.S. economist at Barclays Plc.

At the finance ministers’ meeting, Mnuchin will meet with a dozen of his counterparts, including the finance ministers of Germany and Japan. Trump has threatened to impose tariffs on imported cars from the two countries unless they can reach an accord.

 

— With assistance by Sarah Ponczek, and Katia Dmitrieva

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