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Economic growth for the world's two largest economies hangs in the balance of U.S.-China trade talks

While the U.S. says the Huawei charges are unrelated to trade negotiations, Trump suggested last month that he viewed intervention as a potential bargaining chip.
Image: Workers unload bags of chemicals at a port in China's eastern Jiangsu province on Aug. 7, 2018.
Workers unload bags of chemicals at a port in China's eastern Jiangsu province on Aug. 7, 2018.Johannes Eisele / AFP/Getty Images file

Trade talks between the U.S. and China open up this week amid heightened tension between the two countries, as a slew of earnings reports from big names including Apple, Amazon, and Tesla stand to provide critical proof that trade sanctions are hurting both countries’ economies.

High-level negotiations between President Donald Trump's administration and top Chinese officials including Chinese Vice Premier Liu He begin Wednesday. The stakes are high for both sides, with the prospect of higher tariffs on more goods and a March 1 deadline to reach a resolution.

“Both heads of government seem to have a very strong desire to have a victory and not let the other side claim a victory,” said Michael O. Moore, a professor of economics and international affairs at George Washington University. “Both seem to want to be the alpha male.”

U.S. officials have sent mixed signals, with Treasury Secretary Steven Mnuchin expressing expectations of “significant progress” while Commerce Secretary Wilbur Ross warned of "lots and lots of issues" for negotiators to address.

Against this backdrop is a ratcheting-up of pressure on Chinese smartphone giant Huawei. On Monday, the Justice Department filed criminal charges against its Chief Financial Officer Meng Wanzhou — who is currently detained in Canada — for activities pertaining to business with Iran in violation of economic sanctions. The DOJ also accused the company of stealing trade secrets from T-Mobile five years ago.

U.S. officials have said the Huawei charges are unrelated to trade negotiations, but Trump suggested last month in a Reuters interview that he viewed intervention as a potential bargaining chip. “If I think it's good for the country, if I think it's good for what will be certainly the largest trade deal ever made — which is a very important thing — what's good for national security — I would certainly intervene if I thought it was necessary," he said.

“I think both sides are playing hardball with this, potentially in a way that helps a deal but potentially in an unconstructive manner,” Moore told NBC News.

Erin Ennis, senior vice president of the U.S.-China Business Council, said it is important for the integrity of the negotiations that the two topics aren’t conflated. “Our hope is that they remain separate,” she said. “There’s always a risk they could bleed into the trade negotiations… We hope that’s not the case here. Law enforcement activities should be separate from political discussions and trade negotiations.”

According to one survey the U.S.-China Business Council published last fall, nearly three quarters of respondents said their business had been impacted by tariffs and related trade sanctions.

As a number of companies report quarterly earnings this week, there is mounting evidence that these trade issues have begun to dent the profits of American manufacturers and tech firms, sometimes significantly.

“Everything we’ve seen suggests the option of simply passing along tariff costs to customers is more limited than we might have thought,” said Bruce McCain, chief investment strategist for Key Private Bank.

“A lot of companies find some way to absorb the cost on a short-term basis and look for a long-term solution,” he said, but there are indications that companies are about at the limit of being able to accommodate those costs.

Apple cited declining sales in China as a reason for lowered revenue this quarter. Motorcycle brand Harley-Davidson reported earnings on Tuesday of 17 cents per share, a surprising drop from the 28 cents analysts expected. Equipment manufacturer Caterpillar and chipmaker Nvidia, which both reported disappointing quarterly figures on Monday, each cited China-related causes behind their difficulties.

“It’s clear that the tariffs are beginning to hit home in China and that’s having significant ripple effects… China’s been the global growth locomotive or many years,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “If they’re entering a slowdown, that’s a really big deal.”

Economists say the tariffs are hurting American companies in direct and indirect ways. Companies that utilize imported steel and aluminum have been paying more to manufacture their products, which cuts into profits. American companies that depend on the Chinese market for growth — which most do, according to the U.S.-China Business Council — have struggled with slumping sales due to a combination of China’s domestic economic growth slowing, higher input costs and retaliatory tariffs pushing up prices.

“Not only do you have some direct issues in terms of some of the specific trade measures [but] there’s also the retaliatory impulse,” McCain said.

“China’s got retaliatory tariffs on about 85 percent of imports,” Ennis said. Many companies that sell high-tech or complex products in the Chinese market import parts from China, make the finished product in the U.S. and ship it back into China to protect their intellectual property. These companies effectively get hit by tariffs twice, she said.

“That probably is the ultimate damage that’s being done to these companies right now,” she said. “The price competitiveness has eroded in many areas.”

This is a bad place for companies to be today, McCain warned. “At the same time, it’s also an environment when everybody expects earnings to slow anyway,” he said. “Both forces are there and it’s probably going to be a very difficult quarter for that reason.”

Kirkegaard said the White House is at a disadvantage going into the trade talks, since Trump spent so much of his political capital on the recent month-long government shutdown. “He, in my opinion, is not in a position to cave or strike a deal with the Chinese from a position of strength at this point,” he said. “I think the best you can hope for is to kick the can down the road with an agreement to continue to talk so you do not get an escalation.”

Were Trump not coming into this fight already bruised, international trade experts say the U.S. would be in a relatively advantageous position. “In the normal world, this would be the perfect time for a deal. Certainly, the Chinese economy is weakening. There’s evidence that there are some headwinds in the U.S. That’s when both sides really have an interest to conclude talks successfully,” Moore said.

The greatest danger at this point is of a stalemate that prompts one or both countries to escalate trade sanctions. Trump has already threatened higher tariff levels, and tariffs including the entirety of Chinese imports. While this would certainly hurt Chinese economic growth, it also could be potentially devastating for American companies and investors.

“The markets have already signaled there’s enough uncertainty out there that that could lead to a bad outcome,” Kirkegaard said.

“The longer it drags on and the more recalcitrant each side becomes, and the more they ratchet it up with higher and escalating tariffs, the worse it is for everyone,” McCain said.