Deeper dive

Noisy trade rhetoric obscures the bigger battle: We believe the US-China dispute runs much deeper than trade tariffs.

Rhetoric in the US-China trade dispute continues to be confusing and contradictory. Last week, President Donald Trump declared he was in “no rush” to complete a deal with China, on the same day that his former chief economic adviser, Gary Cohn, said the president was “desperate” to reach an agreement. US Trade Representative Robert Lighthizer told US senators he was hopeful “that we are in the final weeks of having an agreement” on trade with China, while at the same time warning that “major issues” remained.

  • Our base case is still that a partial agreement will be reached, and some near-term de-escalation of the tariff issue is achieved. But the past week has also provided fresh evidence that the dispute runs much deeper than trade tariffs and supports our view that the US is trying to conserve the wasting asset of its relative economic size and geopolitical influence against the rise of China.
  • Battle lines are drawn over international communications. The Wall Street Journal reported that the US and its allies are now examining the role of China’s Huawei in deep-sea fiber optic infrastructure. These networks, which carry the vast majority of international data and communications, have historically been built by US, European, and Japanese firms. US security officials now claim Huawei’s expertise and knowledge of these networks could allow it to monitor, divert or even sever cables. This latest news followed a blunt US warning that Germany could face reduced access to US intelligence if it employs Huawei technology in its 5G infrastructure plans.
  • The EU shifts toward the US stance. A new European Commission paper called for a “more balanced and reciprocal relationship” with China, which it argues has “increasingly become a strategic competitor for the EU while failing to reciprocate market access and maintain a level playing field.” A number of the irritants outlined in the strategy document, including limited market access, weak intellectual property rights, and state industrial subsidies, line up with those the Trump administration has also lodged against China. The EC paper suggests 10 action points to remedy this imbalance, including taking a “common EU approach to 5G networks”, and more stringent screening for “security risks posed by foreign investment in critical assets, technologies and infrastructure.” The EU’s marked shift in stance prompted a swift response from Chinese Premier Li Keqiang, who highlighted efforts to strike a “reciprocal and fair” investment agreement with the EU, while promising that a bilateral China-US trade deal would “neither take advantage of nor harm the interests of a third party.”
  • Italy breaks ranks. Italian Prime Minister Giuseppe Conte has said that he is open to China and Italy signing a framework deal supporting China’s Belt and Road Initiative (BRI) during President Xi Jinping’s state visit this week. The multi-decade BRI aims to create international infrastructure networks that would connect China to other Asian countries, the Middle East, Africa and Europe. But the US is concerned about China’s influence in the Mediterranean Sea if it were allowed to increase investment in Italian ports. Italy’s Corriere della Sera newspaper reported that the US would stop sending sensitive goods to the Italian ports of Genoa and Trieste if China were allowed to build infrastructure there.

In the near term, financial markets are likely to continue to react to the prospect of a US-China deal on tariffs, set against a backdrop of softer economic data and a more accommodating stance from the world’s major central banks. But the deep-seated, longer-term nature of US-China rivalry is likely to continue to be a source of periodic volatility, and any market enthusiasm in the event a trade deal is signed should be tempered by this more negative backdrop.

Mark Haefele


Bottom line

Despite the on-again, off-again nature of US-China trade rhetoric, our base case is still that a partial agreement will be reached, and some near-term de-escalation of the tariff issue is achieved. But events of the last week have also illustrated the wider nature of the dispute as the EU adopted a stance on China closer to the US position, battle lines were drawn in the struggle for communications supremacy, and China sought backing for its Belt and Road Initiative.