Trade talks with China begin in Washington

Dive Brief:

Talks kicked off this morning between Chinese Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer to resolve issues that could keep the tariff rate on $200 billion in Chinese goods from increasing to 25% from the current level of 10% March 2.
The Congressional Budget Office (CBO) released its annual economic outlook report Tuesday projecting the current tariffs will limit GDP growth by an average of 0.1% for the next 10 years due to decreased consumer spending and lower exports.
The CBO expects exports to decline by 0.5% by 2022, noting that continued uncertainty around trade policy could exacerbate the decline.

Dive Insight:

Various members of the Trump administration have displayed differing levels of optimism for the talks in recent days. Last week, Commerce Secretary Wilbur Ross told CNBC "we're miles and miles from getting a resolution."

Meanwhile, Treasury Secretary Steven Mnuchin said to expect "significant progress" from the talks, and White House economic advisor Larry Kudlow described Trump as "moderately optimistic." Kudlow added that Trump believes he and Chinese President Xi Jinping will be the "ultimate negotiators."

It is yet unknown whether Trump will be involved in this week's talks, and there is no evidence the parties have resolved central issues of intellectual property and technology transfer.

The President and his negotiators may feel they have an advantage in the talks since China's economy has begun to show signs of weakness, but pressure from U.S. businesses is only growing stronger.

Air cargo volumes are stagnant, CEOs are projecting a coming drop in imports and automakers are blaming tariffs for declining profits. Harley-Davidson executives on their earnings call Tuesday laid out a plan for the year that includes the tariff bump to 25%.

American businesses are increasingly dependent on Chinese customers as the middle class in China has expanded, so beyond U.S. tariffs, retaliatory tariffs are hitting bottom lines too. Along with Harley, which lamented a drop in sales to China in the fourth quarter, various products from iPhones to heavy industrial machinery are seeing Chinese sales decline.

So far Trump has largely resisted whingeing from the business community, except for the unique case of agriculture. Should the talks end without a resolution, a new level of frustration from U.S. businesses will likely test the administration.