“We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”
– President Donald Trump (on Twitter), 04 April 2018.
You would think, based on the surprise that has greeted President Trump’s recent decision to walk to the brink of a trade war with China, that he had not talked about punishing the Chinese trade practices for years. President Trump has consistently tried to follow through on the biggest promises that were central to his political campaign. To judge from the recent volatility in equity markets around China/US relations, investors (admittedly reacting in part to conflicting signals from the Administration) are struggling to get this on-board. Perhaps the penny will now drop after President Trump volunteered on 06 April that at least a modest sell-off was necessary if he was to achieve his objectives. And bear in mind too, that only a relatively small proportion of President Trump’s ‘core’ vote is going to be directly affected by stock markets taking a hit.
For context though it is important to note that the US economy is $19,800billion. The Chinese economy is $11,200billion. Total trade, let alone trade in any discrete set of consumer products, is just not big enough for a trade war between them. Of course, if you are a company selling the affected product lines, a 25% tariff still remains a huge distortion: a line-by-line analysis of US imports from China, for the 1333 products affected by new tariffs, highlights that the two stand outs are Flat Panel TVs and Printer Ink & Printers. So this matters to companies bottom-up; more than to markets top-down (beyond the imminent effects on sentiment). The numbers are clearly going to struggle to leave a big dent, which is exactly the conclusion UBS Investment Bank analysts came to, post revisiting the trade disputes between the US & Japan in the 1980s.
Chinese President Xi Jinping delivered a speech earlier this week in which he addressed recent US-China trade tensions, calling for “peace and cooperation (through dialogue)” while cautioning against a “Cold War mentality and zero-sum game thinking”. President Trump praised Xi’s “kind words on tariffs and automobile barriers”. It would seem sensible to approach Xi’s détente on trade with caution and note it will likely be a drawn-out process of negotiations. China will continue to leave room for negotiation and cooperation, while responding with tit-for-tat retaliation threats if needed. Whilst it is hard to predict a timeline for negotiations, let alone whether they can achieve visible results, we expect a long process during which we will continue to see volatility as headlines swing sentiment.