Equity markets have been rallying on the prospect that the trade-related cloud hanging over the global economy could be lifting.

The S&P 500 index is up more than five percent since Thursday, buoyed both by last week’s strong U.S. jobs figures and the sense of momentum in talks between U.S. and Chinese negotiators. The two countries can reach a deal they “can live with,” U.S. Commerce Secretary Wilbur Ross told CNBC Monday. His boss seems equally optimistic:

That’s reflected in the upbeat tone of statements from both sides following talks in Beijing this week. The meetings “laid the foundation for resolving mutual concerns,” according to a statement Thursday from China’s Ministry of Commerce. Similar noises came from the Office of the U.S. Trade Representative.There’s a problem, though. Progress on early-stage talks – or indeed, an actual signed agreement ahead of the planned March deadline – is in many ways the easiest part of this process. Getting the deal to stick is the real challenge.

“An agreement is fine but the history here has not been so good on compliance,” Ross told CNBC. “The real issue here is what are the enforcement mechanisms? What are the punishments if people don’t do what they were supposed to do?”

The major first-round breakthrough from the Buenos Aires meeting between President Donald Trump and President Xi Jinping – a touted Chinese crackdown on the opioid fentanyl – is a case in point. China has in theory been pouring herbicide on the fentanyl trade for three years now but the weeds keep growing. It’s not clear if even this latest agreement will stick, or indeed what exactly has been agreed.

The most obvious compliance mechanism is the one that’s already in operation: tariffs. The damage that both economies are increasingly suffering from these restraints on trade represent a potent piece of leverage in the talks. U.S. Trade Representative Robert Lighthizer is looking at only winding back the tariffs when there’s evidence the Chinese are upholding their end of the deal, or merely suspending them so they can be reimposed if there’s backsliding, the Wall Street Journal reported Tuesday.


From Washington’s perspective, there’s a compelling logic to that approach. Implementation of any deal will be “subject to ongoing verification and effective enforcement,” Lighthizer’s office said in its statement Wednesday. The problem is how it will be perceived in Beijing.

After all, Chinese negotiators can argue that they’ve already offered several concessions in this process: opening the auto manufacturing, shipbuilding and aerospace industries to foreign entrants; allowing foreign companies to operate power grids, railways and gas stations; and introducing a new set of punishments to crack down on intellectual-property theft. They’re even removing tariffs on U.S. car imports and restarting purchases of soybeans, cosmetic moves that nonetheless will be presented as evidence of Beijing’s flexibility.

If, in the face of a shaky economic outlook on both sides of the Pacific, a further round of concessions from Beijing is answered with no more than a promise from Washington to pause the trade war, there’s a risk the fragile goodwill that’s emerged in recent weeks could evaporate very quickly. The two sides are closer on areas such as energy and agriculture but further apart on harder issues, people familiar with the talks told Andrew Mayeda and Miao Han of Bloomberg News. More to the point, the recent equity market rally has been predicated on the idea that a deal could lift the brake that tariffs are currently placing on the global economy. 

If removing the levies is contingent on the Chinese government providing evidence it can enforce its economic policies, that reassurance could be a long time coming.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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