With both sides appearing to read off the same “Art of the Deal”-style-negotiations script, the seemingly unending US-China trade deal talks continue to see-saw from progressing to digressing this month. Ahead of the planned US December tariff hike that seeks to encompass all Chinese goods purchases, it appears that both sides are hopeful for a preliminary agreement. Dubbed the ‘Phase 1’ deal, the agreement looks to put in place terms over certain chapters of the hopefully soon-to-be-completed trade deal. Initial reports cited that, in a push to get this deal through, the US would rollback some tariffs imposed over the previous months. Expectedly, Trump responded to this with, “I haven’t agreed to anything, China would like to get somewhat of a rollback, not a complete rollback because they know I won’t do it”.

This, however, was slightly at odds with economic adviser Larry Kudlow’s comments that, “If there’s a Phase 1 trade deal, there are going to be tariff agreements and concessions”. Kudlow made these comments on Bloomberg News, where he was also televised earlier in November describing preliminary and summary details of a possible ‘Phase 1’ deal. He described Chinese officials as ‘upbeat’ in the matter.

Agriculture: ‘virtually complete’

The agriculture chapter, a hot topic throughout the trade war, has benefited from productive negotiations on both sides. With China alone holding a majority market share by value in US soybeans, the incentive to reach agreement on this item was large for the US. In July, the Trump administration had rolled out a farm subsidization package worth approximately $16bn to help offset the effects of lessened Chinese demand. Farmers, who comprise a key constituency group for Trump, could expect a $40-50bn increase in purchases from China should a ‘Phase 1’ be agreed.

Financial: ‘virtually complete’

A key prohibitive policy in China which puts limits on ownership of foreign banks, insurance companies and securities firms operating onshore has been of particular nuisance to US firms looking to expand into the immense Chinese capital markets. Conditions on the removal of these terms has been discussed over the past several years between high ranking officials of both governments, however the inclusion into the language of the possible ‘Phase 1’ deal may accelerate the opening of the Chinese financial markets to US players.

Currency: ‘virtually complete’

A favourite target for Trump, the currency intervention program in China has also been negotiated to include safeguards against manipulation. The People’s Bank of China typically conducts large scale market operations to help guide the renminbi exchange rate within favourable levels. Currency stability and guarantees on a free-floating exchange rate are largely agreed to under current negotiations.

Intellectual Property Theft: ‘much improved’

Kudlow also claimed to have ‘come a long way’ on issues of IP theft with Chinese officials. This chapter was another acutely politicized issue throughout initial claims of unfair practice made by the Trump administration and is key to making a full deal.

Whilst both Trump and Xi have each indicated a will to put in a place a preliminary agreement, Trump conceded no ground by emphasizing that Beijing wants a deal, “much more than I do”. Negotiators will not publicly expand on the key setbacks or sticking points that remain in signing a ‘Phase 1’. Among those minor setbacks purportedly includes a venue for Trump and Xi to meet, given the recent turmoil in Chile leading to the cancellation of the APEC summit. Officials continue to cite ‘enormous progress’, which has indeed lightened global risk sentiment in recent weeks. The US administration would not go as far as to say that further tariffs, like those planned for December, are not still on the table.

Moving into a ’Phase 2’, issues most prominent in negotiations will be centered around the practical implementation of a complete deal. That would include most broadly, reliable enforcement of the terms and agreements negotiated throughout the process. Another controversial matter includes the use of ‘Forced Technology Transfer’ by the Chinese administration, whereby foreign companies are required to share their technology with the state in exchange for market access.

As the end of the year approaches, speculation will continue to swirl on the ability of deal teams to strike an understanding. “I don’t think it should be a problem, getting it papered,” said Trump last week, adding that he expected that to occur over the next four weeks.

With each positive headline, the market seems to increase risk appetite, which should continue to support the currencies of those countries which export to China, and to support ‘risk-on’ currencies such as EM.  Watch this space.