President Trump nudged towards a trade truce

The US-China trade ‘truce’ has been welcomed cautiously by markets. But the truce is fragile, and a firmer catalyst could be needed to drive markets significantly higher

Thomas Costerg, Dong Chen, Jacques Henry & Julien Holtz

President Trump nudged towards a trade truce

On Friday, President Trump agreed to a ‘truce’ with China Vice Premier Liu He. The truce means that this week’s scheduled tariff increase on USD250 bn of Chinese imports to 30% from 25% has been put on ice. The ‘truce’ would seem to mark a de-escalation of the trade dispute by the Americans given that China’s concessions are meagre: with the US president now squarely focused on his re-election in November 2020, Trump likely felt the pressure from the sharp slowdown in business confidence and investment in the US economy.

In spite of the handshakes of 11 October, we believe the status quo could largely prevail. At this stage, we do not believe Trump will carry out a previous threat to impose new tariffs in December (i.e. a 15% tariff on imports from China not yet taxed). However, we would caution that Trump has already made several U-turns on Chinese trade in recent months.  On balance, we believe it is still more likely that new tariffs will be introduced at some time down the line rather than that all existing tariffs will be removed.

Trade relations between the US and China could remain fraught, not least because sensitive topics, such as intellectual property, were left to a hypothetical “phase 2” or even “phase 3” of trade negotiations. The continued influence of China hawks inside the White House and the emergence of hard-line Democratic presidential candidates like Elizabeth Warren, together with the weak state of the US economy and question marks over its medium-term trade strategy could all weigh on US trade relations with China.

Given the fragility of the truce, and given that the wider economic backdrop remains weak, US equities greeted the news of trade de-escalation with only cautious optimism. A certain dose of scepticism is salutary when predicting the outcome of trade tensions. As equity markets have been rattled by trade tensions for more than a year (especially in Asia), last week’s events should be seen more as triggering a decrease in pessimism rather than a surge in optimism in financial markets. The upcoming earnings season may prove a much stronger catalyst for market sentiment than a symbolic handshake.

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