US, China trade war on hold

Thought of the day

by Chief Investment Office 21 May 2018

What happened?

Second-round China-US trade talks in Washington last week appear to have succeeded in de-escalating bilateral trade tensions, with the two countries issuing a joint statement on 20 May, noting an agreement to “substantially reduce the United States trade deficit in goods with China.” The text of the joint statement reveals China has agreed to “significantly increase purchases of US goods and services,” including a “meaningful increase in US agriculture and energy exports.” Intellectual property protections and market access issues were also raised in the note. Following its release, US Treasury Secretary Steve Mnuchin declared “the trade war (is) on hold” in a TV interview, while China’s Vice Premier Liu He told Chinese media both governments had agreed not to impose additional tariffs for now.

What does this mean?

This marks a significant de-escalation of China-US trade tensions, in our view, and reduces near-term trade risk uncertainty for global investors.The communique is a notable step back from the at times heated rhetoric of the last few weeks, and suggests the more pragmatic trade camp within the White House may be ascendant. A mutual agreement to pause tariffs offers more time for complex consultations, and is in line with our base case for a negotiated trade settlement. However, we note that the scale and scope of any concessions remains unclear, with no dollar figures or timelines in writing.

What next?

Trade tensions have been de-escalated but not defused, in our view, with still significant fundamental differences between the world’s two largest economies. President Trump has focused sharply on the US trade deficit with China, which stood at USD 375bn last year. Reducing this by more than half, a goal raised by some US officials last week, might necessitate unwanted concessions, like the relaxation of US high-tech export restrictions to China. Any shift in Chinese imports towards the US could also have unintended economic consequences on important US allies, like Europe and Australia. While the text mentions intellectual property (IP), it is unclear what it means for the ongoing US investigation into alleged Chinese IP abuses. There is no word on US sanctions relief for telecom giant ZTE, a key Chinese concern. Significant disagreements, including concerns over state subsidies and the “Made in China 2025” program, remain unaddressed. We maintain our overweight on global equities, and our preference for Chinese equities within our Asia portfolio.

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