More than 50-50 chance of a ‘phase one, skinny deal’ between US and China, economist says

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Stephen Roach

Kate Rooney | CNBC

The United States and China are likely to ink a “phase one” trade deal because the presidents of both countries have incentives to do so, a Yale University professor said Tuesday.

“There’s a better than 50-50 chance we will get a ‘phase one, skinny’ deal, largely because both presidents, Trump and Xi, need this for domestic political reasons,” Stephen Roach, a senior lecturer at Yale University’s Jackson Institute for Global Affairs, told CNBC’s “Squawk Box.”

Clinching the trade agreement with Beijing could help U.S. President Donald Trump “deflect attention away” from the political problems he’s facing on the home front, Roach said. Trump, for his part, is facing an impeachment inquiry in Washington.

“Make no mistake about it, the phase one deal, as we’ve been led to understand it, is a phony deal that will accomplish nothing in the way of meaningful positive impact on American families and American consumers,” he said.

Roach explained that while the preliminary agreement addresses the bilateral trade deficit between the Washington and Beijing, it fails to recognize the United States’ existing trade deficits with other countries.

“This is a deal that is purely designed as a political fix,” he added.

In October, negotiations between both sides resulted in what Trump described as a “very substantial phase one deal.” The president said it would address U.S. concerns about intellectual property and financial services access, and include Chinese purchases of U.S. agricultural products.

But Washington and Beijing have yet to finalize and sign that deal. China has said it would like to see the U.S. cancel additional tariffs and roll back duties as part of the agreement. But Trump cast doubts on that idea and even threatened additional duties on the world’s second-largest economy.

If the two sides cannot pin down an agreement by Dec. 15, additional U.S. levies on Chinese exports are set to go into effect. In late-November, a senior official at the U.S. Chamber of Commerce told CNBC the two countries may not be able to lock down a firm agreement before that date.

Yale’s Roach said while it’s hard to predict the next “twist and turn” on the tariff front, he thinks Trump may be “prepared at this point to stand down a bit,” as the president did in October when he suspended a tariff hike on $250 billion of Chinese imports.

“I think he’ll do the same thing in 13-14 days with the mid-December deadline as well. He’ll kick the can down the road,” Roach said.

Both countries have applied tariffs on billions of dollars’ worth of each other’s goods to-date, which have weighed on their economies. Data this week showed manufacturing activity in the U.S. continued to lag in November.

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