Trump is winning the game of economic chicken right now with China, but that could soon change – CNBC

Trump administration officials and the president himself have pointed to the slower Chinese economy as a reason for Beijing to negotiate. “I think China wants to get it resolved. Their economy’s not doing well,” President Donald Trump told reporters at the White House on Sunday, according to Reuters. “I think that gives them a great incentive to negotiate.”

Commerce Secretary Wilbur Ross said Monday that the tariffs are making it difficult for China to stave off social unrest.

But economists say the Chinese economy should start turning around. The BofAML economists say that China has more room to ease policy in response to the trade war. Last week, China implemented another cut in bank reserve requirements, and more moves have been expected.

“China is employing its full arsenal of stimulus tools — monetary and credit easing, a weaker currency, spending increases and tax cuts,” the BofAML economists noted. “… Meanwhile, the US has limited room to loosen policy. Fiscal policy is trapped in gridlock and the government shutdown actually means a small fiscal tightening. The Fed can cut rates, but is reluctant to do so with the economy already beyond full employment. It also worries that a quick response creates moral hazard by anesthetizing the rest of Washington against its policy problem.”

Cesar Rojas, Citigroup global economist, said he sees an opportunity for a deal now, in part because of the dynamic of weaker Chinese growth, but there is no guarantee one will be reached. “There is a window of opportunity for the U.S. and China to come to a deal,” he said. “Growth is moderating in China, equity markets have been falling in the U.S. and China, and this basically opens a window of opportunity. This may close soon.”

Rojas said the U.S. economy is still strong, giving it more leverage against China, where its stimulus has so far failed to stem weakening. But that should change, and China could stabilize as the U.S. growth weakens later in the year, shifting the advantage to China. There could be a scenario where the March 1 deadline passes without new tariffs. “Even if there is no tariff increase, we describe this situation as tariff limbo. This uncertainty is having an effect on the economic decisions, which is already having an impact,” he said.

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