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The trade war is far from over

Markets got excited last week, hoping that a trade agreement was close to being signed. But it’s best not to get too excited until a deal is done.

Markets got excited last week, hoping that a trade agreement was close to being signed. But it’s best not to get too excited until a deal is done.
Garry white employee

Garry White

in Features


Progress in trade talks between the US and China may have finally been made, but any euphoria surrounding last comments from Beijing may be overdone. A roadmap to an interim deal appears to be in place, but a deal is not done until a contract is signed – just ask Donald Trump.

“Deals are my art form,” the president wrote in his infamous book The Art of the Deal. “Other people paint beautifully on canvas or write wonderful poetry. I like making deals, preferably big deals!”

A trade deal with China would certainly be a big deal – the biggest he has ever made. But the optimism displayed by markets this week that the final chapter of the trade war could be close at hand looks premature.

Investors would be wise to pay attention to another important comment from Trump’s magnum opus: “I always go into the deal anticipating the worst. If you plan for the worst – if you can live with the worst – the good will always take care of itself.” Right now, markets are not doing this. A lot of positivity has already been priced into equity markets, leaving plenty of scope for an upset. 

Beijing provided hope

On Thursday last week, China’s Commerce Ministry said that Beijing had agreed with Washington to lift existing trade tariffs between the two nations in phases. “If China, US reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” ministry spokesman Gao Feng said. US authorities also con firmed that this was the case on Friday.

The word “if” was doing a lot of the heavy lifting in this statement. There are still no concrete signs that an agreement is anywhere near being signed and the details of what it could involve remain absent. However, this agreement in principle is the first sign of compromise from US negotiators and represents a small step in the right direction.

Comments from the Trump administration this week also suggested that any meeting between President Trump and his Chinese counterpart Xi Jinping to sign an interim deal could be delayed until December from November, which implies that a number of sticking points remain.

Any deal is widely expected to include a pledge from Washington to scrap tariffs that are due to come in on 15 December on $156bn (£122bn) worth of Chinese imports to the US, including cell phones, laptops and toys. This will not be a major issue for Donald Trump. These December tariffs are on products that will hit US consumers harder than the previous round of trade barriers as these are consumer goods bought by most Americans. It may actually be in President Trump’s interest that these tariffs do not go ahead.

Then there’s Huawei. Although the US Commerce Department has said it was preparing to provide exemptions from its blanket ban on exports to Huawei as part of the interim deal – it is unlikely to allow US companies to purchase products from the Chinese technology giant. This could be yet another sticking point for Chinese negotiators that will be hard to resolve without making it look like the White House has given in to Beijing.

Farm exaggeration

So, what could China offer in return? The quid pro quo for Washington will likely be China increasing agricultural purchases, something that the president sees as vital for shoring up rural support for his re-election campaign next year. Three weeks ago, President Trump said that China may agree to make purchases of between $40bn to $50bn of US agricultural goods a year, but these numbers simply do not add up.

Purchases at this level would represent double the amount that China spent on American farm goods in 2017, the year before the trade war started. It is not even clear that they could even hit pre-trade-war levels now, as the Chinese have, quite obviously, diversified their supplies to other nations that are cheaper than American goods plus levies.

At a meeting in Vladivostok in August, Russian leader Vladimir Putin and Chinese President Xi Jinping signed an agreement that aimed to double their trade over the next five years – to $200bn by 2024 – by implementing joint projects in the fields of energy, industry and agriculture. The country has also increased soya bean purchases from Brazil. This implies at even if an interim agreement can be scraped together, the long-term damage for rural American communities has already happened.

A report from the Boston Consulting Group last month underscored the problem for US farmers. “By making US crops and foodstuffs more expensive than alternatives, high tariffs lower the cost to importers of diversification,” the report noted. “And the less faith importers have in the US as a stable supplier, in view of the potential for future trade conflicts, the more necessary it becomes for them to hedge and further diversify.”

The thornier issues that America has with China including espionage, intellectual-property stealing and the closed nature of its economy will certainly be kicked down the road. But, over the longer term, it is these issues that matter the most. This interim agreement may help boost equity markets in the short term, but it will only pick the low-hanging fruit. Investors need to keep a clear head – there is still much to be done.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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