Odds of a US-China trade deal are ‘rapidly receding,’ Stephen Roach warns

One of Wall Street’s leading experts on China suggests the window is closing on trade deal.

Yale University senior fellow Stephen Roach warns that the United States is playing too much hardball. He cites the decision to put restrictions on China telecom giant Huawei as a potentially costly move in the ongoing negotiations.

“The odds of a deal are rapidly receding,” he told CNBC’s “Trading Nation ” on Wednesday. “We have to be less hopeful now.”

Roach lived in China from 2007 until 2012 while he served as chairman of Morgan Stanley Asia, and he still returns. During his latest trip two months ago, he said the mood was optimistic that reason would prevail and there would be a trade deal.

In his latest note, he writes that the U.S.-China conflict is now in a “danger zone” as tit-for-tat tariffs escalate.

“China historically has a deep sense of feeling humiliated at the hands of the West dating back to the Opium Wars of the mid-19thcentury, ” said Roach. “This is a tough chip on China’s shoulder, and the last thing it wants to do to its leadership is to demonstrate to its constituents is that it’s caving into the West. “

The markets aren’t viewing the trade situation any more positively. The major indexes just saw their third negative session in four, and Thursday’s futures market pointed to a 200-point drop in the Dow.

Even if the two sides find a way to end the trade war, Roach doubts it will be a big driver for the stock market. Plus, he believes the battle’s hangover will have a long-lasting effect on corporate America and White House relations with China.

“If the relief is focused on just narrowing the trade deficit between the two countries and ducking the tough structural issues, then the markets will enjoy it for a nanosecond. ” Roach said. “Then there will be a much tougher reality ahead.”

The White House did not respond to a request for comment.