Markets wary of fragile truce in US-China trade talks
Markets switched their mood last Friday to risk-on against the backdrop of news that the US and China had reached a handshake agreement on “phase one” of a trade deal. Over the weekend, traders and investors had time to consider that the deal needed to be put into a written agreement. This could be tricky, as the sudden breakdown in the negotiations between the two countries in April/May proved. The mood in early Monday trading was much less optimistic, with only a few stocks in the green. These were mainly consumer staples, which will have demand irrespective of the state of the economy.
What really happened last Friday and what are we to make of it? The partial handshake agreement means that the US will suspend hiking tariffs on $250 billion of imports from 25 to 30 percent. The measure was scheduled to take effect on Tuesday. Postponing a measure does not equate to a cancelation, however, and plans for another hike on Dec. 15 persist. The danger of ever-increasing tariffs between the world’s two largest economies still hangs over the global economy like the sword of Damocles.
According to the Peterson Institute, median tariffs between China and the US have increased from 3 to 21 percent in the US and from 8 to 21.8 percent in China — resulting in a serious dislocation of supply chains.
China has promised to import $40 billion to $50 billion of agricultural produce from the US. This will go down well in the rural constituencies of the Midwest and will go a long way toward placating Donald Trump, who faces a presidential election next year.
While it is positive that an agreement seems near and that the imminent danger of a tariff hike has been averted for now, structural issues are far from being addressed. China seems to have drawn a red line when it comes to some of those structural issues, especially pertaining to the influence and subsidies of state enterprises. There are also the matters of theft of intellectual property and limiting restrictions and protection for foreign investors. One could argue that the latter belongs in an investment rather than a trade agreement, which is the route the EU has chosen. Negotiators expect to wrap an EU-China investment agreement up by the end of 2020, which is ambitious.
The danger of ever-increasing tariffs between the world’s two largest economies still hangs over the global economy like the sword of Damocles.
Back to the US. Last week, the Department of Commerce added another 28 companies to its restricted list. Many of them, such as Huawei, operate in the critical tech space. The Treasury is also considering placing restrictions on US investors in Chinese companies and closing loopholes for Chinese companies to gain access to US markets. Again, these issues should probably be discussed under the heading of investment rather than trade. Furthermore, the US government might want to act cautiously, given the Chinese exposure of its T-Bills.
All in all, we have averted an imminent tariff hike and US farmers have achieved predictability for their exports. This is good news for US soybean farmers, who were most affected by the trade war. Between 2017 and 2018, Chinese imports of soybeans from the US sank from 34 to 19 percent and the deceleration continued during the first nine months of this year. Brazil has capitalized on the realignment in the soybean trade pattern.
While last Friday’s events were positive, they do not constitute a breakthrough in the trade war between the two largest economies on Earth. It is also slightly disconcerting that we are moving from structural considerations to what seems to be a purely transactional focus. The trade-off seems to be one of imports of certain goods against a relief in tariff hikes.
In other words, we are not yet out of the woods. International Monetary Fund chief Kristalina Georgieva lowered the institution’s forecast for the global economy last week. She warned that the current trade wars will lead to a generational shift in the organization of the global economy generally and trade and supply chains in particular.
Meanwhile, the US is shifting some of its attention to Europe. Fasten your seat belts, we are in for a rocky few months, if not years, on the trade and investment front. This will affect the global economy as a whole, which Georgieva stressed in an interview with Bloomberg’s Tom Keene last week. The best litmus test is oil — globally traded, liquid and the prime fuel for transportation, which makes global supply chains possible. Brent gained 2 percent on Friday but lost most of it early Monday, when traders woke up to the reality of just how fragile the current truce in US-China trade relations is.
• Cornelia Meyer is a business consultant, macroeconomist and energy expert.