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Trump’s Trade War Holds Business Investment Hostage, Bank of America Exec Says

Capital investment plans and business confidence could be left in the lurch throughout 2020 if President Trump’s trade war with China lingers on past the upcoming election.

“The stars are aligned for a ‘skinny’ deal,” Ethan Harris, head of global economics at Bank of America Merrill Lynch, said Tuesday at the financial firm’s Manhattan headquarters, giving an outlook for the year ahead. “Right now, we are at a point where the Trump Administration has an incentive to do a deal [because 2020 is] an election year.”

The final round of tariffs, still slated for Dec. 15, is largely one that impacts consumer products. “That hurts in an election year,” Harris said, noting that this last group was intentionally left to the end, suggesting a lack of interest in inflicting tariffs that would directly impact American consumers.

The kicker, though, is that Harris believes the trade war is likely to escalate further down the road. While he expects an agreement will be reached at some point, it’s likely to be a toothless accord that does little but allow both sides to agree to a “ceasefire for the election year, and then [proceed with an] escalation post-election,” he said.

That scenario isn’t conducive to business planning, as it also means there’s no chance of a full-fledged deal in 2020. Any lingering long-term risk will dampen business confidence, even if consumers have largely skirted the tariff impact for the moment. Companies have already pulled back on capital expenditure plans, Harris said.

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Some companies are afraid to rearrange their businesses and global value chains in the event that Trump imposes new tariffs on new countries and further muddles the operational landscape.

“Vietnam is a big choice,” Harris said of companies’ limited options, “but Trump has tweeted that Vietnam is a big abuser on trade. So where do you go?”

That kind of thinking is “freezing up business investment,” he said, though he added that equity markets are “convinced” a so-called skinny deal will happen.

“Trump and China understand that they have to get something done [that will be] very symbolic,” Harris said, noting that “it will have a lot of verbiage that sounds positive, without any real hard and fast stuff.”

What the phase one deal could potentially include are increased agricultural commodities purchases by China, and a U.S. delay on the scheduled Dec. 15 tariffs, according to Harris, though the deal will have to be made in short order to avoid the next tariff rollout just over 10 days away.

A Trump win in next year’s elections makes even more, or even larger, tariffs a very real possibility, Harris said. But a Democratic victory doesn’t necessarily mean tariffs disappear overnight–if anything, he said, the trade war could very well be fought with new tools.

While the dispute has been branded a trade war, the real battle is over technology and intellectual property and how the U.S. wants to retain its lead as an economic powerhouse now that China has largely caught up.