With plenty of evidence that the coincidence of the trade conflict with the US and its own attempt to reduce the leverage in its economy has combined to hurt its manufacturing sector and slow its economic growth rate, the authorities’ resort to large-scale fiscal and monetary stimulus is a clear signal of concern. Loading The developing downturn in China’s economy explains why the US believes it can force China to accept its demands in the face of the threat of another $US200 billion of tariffs on China’s exports to the US. ‘’I think we will make a deal with China. I really think they want to. I think they sort of have to,’’ Trump said on Friday. The US has downplayed the damage the conflict is doing to its own industries as the impact of its tariffs feeds into higher costs for business and consumers and reduced demand from China for US products.

Apple, which ignited a sell-off in global sharemarkets last week with its savage revenue downgrade, attributed it to the deceleration of activity in China, which is both a key part of its global supply chain and a major market for its products. The outcome of the talks, apart from its implication for a wider regional economy, including Australia’s, that is acutely sensitive to China’s economic health, is critical for the outlook for the global economy and global financial markets. US Trade Representative Robert Lighthizer leads the ''hawks'' that want to demolish China's centrally-planned economic model. Credit:AP While the Federal Reserve Board chairman, Jerome Powell, may have calmed equity markets on Friday by saying the US central bank would be patient and flexible in implementing US monetary policy this year trade is the other big factor behind the implosion of equity markets in the closing months of last year. If there is no discernible progress towards a trade deal this week – higher level follow-up talks are planned later this month -- it is probable that there will be another eruption of financial markets turbulence.

China has shown it is willing to make some concessions. It deferred the imposition of the next round of tariffs last year, until at least March 1, by agreeing to buy US soy beans and other products and removing the tariff surcharge it had imposed on auto imports from the US. Loading It will inevitably be prepared to remove the retaliatory tariffs it placed on US farm products and agree to buy more US oil and gas and has indicated it is prepared to open up greater access to its system for foreign financial institutions. It is prepared to ban forced technology transfers and strengthen intellectual property protections. That may not, however, be sufficient for the more hawkish figures in the Trump administration, led by Gerrish's boss, US Trade Representative Robert Lighthizer, who want to demolish China’s model of centrally-planned and state-funded -- and subsidised -- state-owned enterprises. They also want China to abandon its ‘’Made in China 2025’’ plan, with its ambition of giving China global leadership in a range of key technologies. The administration sees that plan as a direct challenge to America’s domination of key technologies like robotics, artificial intelligence, clean-energy and bio-technology.

It is doubtful that China would abandon, under duress, its industrial model and economic and geopolitical ambitions. It is no doubt hoping that making non-critical concessions will enable Trump to claim victory -- the ‘’best trade deal ever, ’’ perhaps – while leaving its core policies intact. That’s the best hope for everyone, including the US. The preliminary skirmishes have already done damage to China’s economy and some sectors of the US economy as well as its financial markets and have had flow-on effects in the greater Asian region and even Europe. So far demand for Australian commodities has held up (and will benefit from a fresh bout of stimulus-inspired infrastructure investment) but a full-scale trade war would have much more severe impacts on a global economy which is over-leveraged and already slowing and an Australian economy which (at the household level at least) is over-leveraged and also appears to be slowing.