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Why Trump and China both want to end the trade war

Solving the trade war is in the interest of President Xi and President Trump. A deal should be forthcoming soon.

Garry white employee

by
Garry White

in Features

14.01.2019

Optimism that the trade war that has ravaged global markets could be resolved soon is mounting. China’s Ministry of Commerce said that last week’s discussions with US representatives were extensive and had established a foundation for the resolution of each country’s concerns. In fact, it appears that things are moving into place for Donald Trump to claim his much-desired “win”. But, whatever positive Twitter spin is applied, the victory is likely to be pyrrhic. As Apple has already found out, the Chinese are good at boycotting goods made in other countries when they feel they have been unfairly treated.

President Trump is a showman. It is clear he wants to be remembered as the president who delivered on his promises. This, in part, explains his obsession with “wall”. But he is also a president that has – rather unwisely – claimed that the stock market is an indicator of his success. Luckily for him, China needs a resolution too. There has been a bear market in Chinese shares since 2015 and economic growth is stumbling so much that the prospect of a hard landing has been raised once again. There are concerns that China could miss its 6% target for economic growth this year if the situation deteriorates – a move that would be very negative for equities. Reports in Washington this week noted, as is increasingly clear, that the president is eager to strike a deal to try and reverse some of the negativity seen in financial markets over the last few months. In order to do this, some form of deal needs to be struck soon.

“Both sides enthusiastically implemented the important agreement of the heads of both countries, and held broad, deep and meticulous discussions on shared observations on trade issues and structural problems, laying the foundation for addressing areas of common concern,” China’s Commerce Ministry said yesterday. “Both sides agreed to continue to keep in close contact.”

The US statement was less upbeat, but indicated that further concessions had been made. “The talks also focused on China’s pledge to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services from the United States,” the US Trade Representative said. “The United States officials conveyed President Trump’s commitment to addressing our persistent trade deficit and to resolving structural issues in order to improve trade between our countries.”

As many observers have noted, no one wins a trade war. Even if a ceasefire is declared, the fallout of the current dispute could prove damaging to a number of American companies. Chinese consumers have a long history of using their spending patterns to express political distain. In 1905, China organised a large-scale boycott of American goods after Chinese immigrants to the US experienced serious discrimination, despite being invited into the country to help build its railroads. In 2017, high-spending Chinese boycotted South Korea after land in Seoul was handed over for a US-made missile defence system. The boycott cost the economy some 7.5 trillion won in 2017 (£5.3bn), according to South Korea’s National Assembly’s Budget Office. Both these boycotts were encouraged by Chinese authorities, but they are unlikely to endorse such a move now as it could be too provocative. However, that has not stopped Chinese consumers mounting an unofficial boycott of American-made products.

Last week, Apple issued a sales warning, blaming a slowdown in handset sales in China at a time when Chinese companies were increasing shipments. “Consumers in China and India are showing less interest in upgrading to an iPhone and more interest in upgrading to Xiaomi and Samsung,” Bank of America Merrill Lynch recently noted. “Apple sales may also suffer from a general redirection of Chinese demand away from US products”.

So far, the perception is that it is China that has taken the greatest hit in the trade war – and weak recent economic data backs up that view. Chinese manufacturing weakened in December, factory-gate inflation was the slowest in more than two years and retail sales are growing at the slowest pace since 2013. In response to the darkening economic backdrop, on Monday the People’s Bank of China reduced the reserve asset ratio again for commercial banks. This has freed an estimated 800bn renminbi (£92.6bn) for additional advances to businesses and consumers. We should see the impact of this stimulus on the country’s economic fortunes over the next few months.

It is much more difficult for Americans to boycott Chinese products, as many items assembled in the US have Chinese parts. For the Chinese, it is a much easier proposition to pass over major American brands such as Nike, Apple, Coach, Tiffany or Starbucks. A survey conducted last year indicated that more than half of Chinese consumers are prepared to join a boycott of US goods in the event of a full-blown trade war. For example, 59% of consumers who picked Nike as their top sportswear brand said they would be willing to join a boycott.

Of course, the China hawks surrounding President Trump could act to try and derail a deal which they do not believe goes far enough. However, the importance that Donald Trump puts on equity market performance remains his Achilles’ heel. Let’s hope this spurs him into action.

A version of this article appeared in Friday’s Daily Telegraph.

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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