Why trade war complacency is foolish

The mercurial President Trump, remaining optimistic about a “successful” deal with China, has given equity markets a shot in the arm, sparking a trade relief rally over the past 24 hours. But with the trade negotiations stalling in this diplomatic impasse, and likely to be in limbo until the G20 summit (June 28), how long will it be before tensions flare up again? Or is a 5% fall in the president’s beloved equity market, which we know he views as a live barometer of his success, enough to exercise the Trump put?

As ever, there are many unknowns and complexities, given the opacity of both sides negotiating strategies and we could miraculously have a deal by the G20. However, looking at the current standoff and each side’s complaints, it is hard to see how a compromise is reached by late June. It would therefore be complacent to rely on the hope of a deal being reached quickly. 

The situation could still get worse before it gets better, the US is currently preparing for a public hearing on another round of 25% tariffs and a June 1 deadline for China to raise the rate of additional tariffs to 25% on 2,493 US products is looming. Despite the calm of the past 24 hours, the market could continue to gyrate between risk-on/risk-off as sentiment is determined by trade headlines and tweets. 

This volatility may be creating pockets of value once we get through this period of turbulence, but the uncertainty shrouding the negotiating strategy means a bigger correction could be just around the corner if tensions continue to escalate. Just one tweet could erase all the positivity that we have seen overnight, and we have seen many times before that it is not unlike Trump to vacillate day to day. Even if the US/China negotiation is resolved, the tariff threat may be hitting the EU next, some Trump aides want 25% tariff on EU manufactured autos.

Whilst the comments from the US have been sounding more conciliatory, the rhetoric from China has hardened. As, Christ Dembik points out, it is interesting to note that in the previous rounds of trade disputes that occurred since Autumn 2018, People’s Daily articles mostly used the term “trade friction” instead of “trade war” until now… As of yesterday, all the articles and TV reports mention “trade war”. This terminology change means a lot and confirms that the negotiations have entered a more dangerous phase.