U.S. stocks extended gains and the dollar rose following the news. The S&P 500 Index rallied, climbing 1.3 percent by 1:27 p.m. and heading for its fourth weekly advance, while the dollar traded at session highs.

It's not the first time China has made an offer to reduce the trade deficit as a way of trying to break the deadlock that has darkened the global economic outlook and roiled financial markets since last year. In May, Trump scrapped a framework for a deal negotiated by Treasury Secretary Steven Mnuchin that would have seen China “significantly” increase purchases of U.S. goods.

By agreeing to buy more goods from the U.S., China may just shift its trade surplus toward other trading partners, says Tom Orlik, the chief economist for Bloomberg Economics.

“If China switches its imports from other countries to the U.S.—less Brazilian soybeans, more U.S. soybeans—that might help deal with their bilateral problem with the U.S., but at the expense of worsening imbalances with other countries,” he says.

Additionally, the types of products that China offers to buy more of could matter more than the overall target for a dollar amount, Orlik says. Airplanes, soybeans, and automobiles were among China's top U.S. imports last year.

“Over the years, China has used the offer of purchasing more technologies with national security applications as a gambit in trade negotiations,” says Orlik. “That's always been unacceptable to the U.S. because of the strategic costs.”

Even a massive buying binge would likely fail to eliminate the trade deficit with China, according to Brad Setser, who served as deputy assistant secretary for international economic analysis in the Treasury Department during the Obama administration. It's not clear how quickly U.S. farmers and companies would be able to meet increased Chinese demand, he says. Increasing exports of soybeans would require more land dedicated to growing the crop and investment in storage capacity. Likewise, exporting more to China would demand a surge in investment in export terminals. For Boeing, which has been straining to meet existing orders for its planes, it would likely mean adding a new plant.

Moreover, none of this would address U.S. demand for Chinese-produced goods and China's control of the assembly of products such as smartphones and laptops, which are some of the main drivers of the U.S. trade deficit. Shifting production or final assembly to a place such as Vietnam would do a lot to reduce the U.S. deficit with China, but it would potentially be illusory.

Closing the trade gap “would require enormous changes, and it would require an all-out effort to get a Chinese industrial policy to disguise China's exports to the U.S. by routing them elsewhere,” says Setser, who is now at the Council on Foreign Relations. “You can't get rid of the bilateral deficit unless you shift the location of final electronics assembly out of China. The math doesn't work.”

Decisions Pending

No decisions were finalized in the latest Beijing talks, and discussions are set to continue at the end of January, when Chinese Vice Premier Liu He is scheduled to travel to Washington.

The U.S. will miss an opportunity for discussions with its trading partners after President Donald Trump canceled his trip and the U.S. delegation's visit to the World Economic Forum in Davos next week amid the partial government shutdown. While no plans were disclosed for negotiations, Chinese Vice President Wang Qishan is due to attend the Davos summit.

There's no clear sign that the Chinese offer would have a greater chance of success now, or even whether it's practically feasible. U.S. negotiators are focused on matters including China's alleged intellectual-property malpractice and state support of industry, disputes that are much harder to bridge. The Americans' major sticking points were more prominent issues than China's import plans during the latest round of talks in Beijing, one of the people said.

The Chinese offer would raise the annual import total from $155 billion to around $200 billion in 2019 and in increasing steps thereafter, reaching an annual total of about $600 billion by 2024, one of the people said.

The Commerce Ministry in Beijing didn't immediately respond to request for comment on the negotiation details. The office of the U.S. Trade Representative didn't immediately respond to a request for comment.

From: Bloomberg

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