![The Yangshan Deep Water Port in Shanghai, China. The US and China appear to be pursuing direct trade talks in private.](http://web.archive.org./web/20180326144824im_/http://www.afr.com/content/dam/images/h/0/x/w/j/5/image.related.afrArticleLead.620x350.h0xzat.png/1522055580782.jpg)
Anticipation of a resolution to the trade rift between the United States and China reversed the momentum in global equities on Monday and paved the way for a restoration of calm on Wall Street after an outbreak of heavy selling last week.
Reports that the US and China are holding behind-the-scenes talks to address the fracturing of their trade relationship caused Dow Jones Industrial Average futures to rally ahead of the market open, up 0.6 per cent after the close of trading in Sydney. S&P; 500 futures were up 0.7 per cent.
Investors were encouraged by The Wall Street Journal's revelation that Beijing and Washington were holding private discussions about improving US access to China, marking a departure from the high-stakes declarations of Thursday and Friday when President Donald Trump promised to address "hundreds of billions of dollars" of intellectual property theft, and slash the bilateral trade deficit. China responded to this provocation by saying it was "not afraid" of a trade war.
The White House signalled it would tax $US60 billion ($77.5 billion) worth of Chinese goods by up to 25 per cent, prompting China to target $US3 billion worth of trade with tariffs on more than 100 products, including recycled aluminium and pork.
![Dow Jones Industrial Average futures ralled ahead of the market open, up 0.6 per cent after the close of trading in ...](http://web.archive.org./web/20180326144824im_/http://www.afr.com/content/dam/images/h/0/w/7/5/2/image.imgtype.afrArticleInline.620x0.png/1518742168480.jpg)
The S&P;/ASX 200 index fell half a per cent or 30 points to 5790.50 points, returning to 2017 levels, after falling 0.8 per cent in early trading following the Dow Jones' 4.7 per cent two-day fall.
Better deal for Americans
Ashley Pittard, who runs BT Investment Management's global equities strategy, ventured that Mr Trump was likely to walk away from this period of trade tensions with a better deal for Americans, which was good news for an economy that is also the world's largest consumer.
"I think about it a little differently than the average economist," the fund manager said. "That is, currently the tariffs are pretty limited – and I'm confident they will remain so – but are being used as an example to offenders to bring their own practices into WTO lines.
"The USA is the most open economy globally and its manufacturing base has been eroded over the years from successive offshore governments that have offered incentives and protectionism for their own industries. As an illustration, you cannot produce cars in China unless you have a majority Chinese partner," he said.
The US economy is on track for above-trend growth in 2018 and 2019, Westpac economist Elliot Clarke said, referencing the Federal Reserve's updated projections of last week and its rate hike guidance. But there is a new risk for markets to contend with that comes from the three-pronged US trade strategy, which beyond tariffs also includes bringing a WTO complaint and new investment restrictions for Chinese companies targeting the US.
"These measures are only known in a loose sense," Mr Clarke said. "What remains completely unknown is the eventual market and economic impact that will multiply quickly with any retaliation that follows.
"This is what we have to watch out for as it could turn the current relatively benign situation into a real shock for the global economy."
China has the most to lose
Credit Suisse strategists argued China would be proactive in any trade negotiations as it had the most to lose from a trade war.
"China has more to lose from a sharp escalation in protectionism and is likely to push for negotiations to address the USA's main grievance: the lack of equal and reciprocal access for US businesses selling their goods and services in China," the broker said. This was also "preferable" to cutting off the supply of Chinese-made goods that US households enjoy buying.
On Monday, further evidence of US willingness to back down from its initially hawkish overtures emerged. The US will not impose tariffs on steel imports from South Korea, according to South Korea's trade ministry, but South Korea has agreed to be limited to a quota covering the volume of steel exempted. Australia, Canada and Mexico are already spared from this tariff, which also covers aluminium. The US has also extracted broader access for car exports to South Korea.
"Because the USA is the largest consumer economy globally, over time they will get their way," Mr Pittard predicted, citing the prospect of improved access to controlled markets, which should support further jobs growth in the US economy. "It's easy for the USA to win a trade war."