Done deal? Not so fast...

Trade deals are complicated. Those involving the largest economies in the world are especially complicated, particularly when the participants are simultaneously growing ever more competitive and even geopolitically confrontational. So, should it be a surprise that developments this week, highlighted by President Trump’s statement below, suggest a final deal has yet again proved elusive? We think not.

“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%.”

             President Trump on Twitter, 5/5/2019

When we made our initial call in 2018 for a de-escalation of trade tensions, the world was a different place. Markets were jittery, the talk of a U.S. recession was omnipresent (we were not believers), and Chinese economic growth had fallen to the slowest rate in decades. In other words, pressure was building for political leaders to take action. The positive turn on trade negotiations started at the G20 Buenos Aires dinner between President Trump and President Xi in December. While there have been bumps along the way, a trend of encouraging trade related comments has been the norm since then. Yet as the two sides careened towards an agreement, something happened along the way - markets reversed, U.S. economic momentum accelerated, and Chinese growth stabilized (see Figure 1). The “best alternative to a negotiated agreement,” a crucial consideration in negotiations, has improved for both leaders, and these positive economic developments may have emboldened a firmer stance. President Trump’s recent aggressive statements are said to be in response to China backtracking on commitments made during the earlier rounds of negotiation, reiterating a comfort that prospective tariffs will not derail the U.S. expansion. 

So where do we go from here? Our baseline call was for reduced trade tensions in 2019, but we have hesitated to fall in line with consensus suggesting that a substantive deal was imminent. The question we have been asking ourselves most recently was not; “will a deal be reached”, but instead; “how much better can the trade news get”? As it turns out, perhaps not much. This was one of the reasons we recommended raising some cash for possible future opportunities, and this week’s news reinforces the negatively skewed nature of the current geopolitical backdrop (i.e. more possible downside than upside). With Chinese trade delegates in the U.S. this week the potential exists for the return to a positive trajectory. Meaningful economic incentives still remain in place for both sides, but neither President Trump nor President Xi is likely to accept an outcome that portrays a weak image. The statement on May 8th from China’s government mouthpiece, the Xinhua News Agency, confirms this stance; “China deeply regrets this, and will be forced to take necessary countermeasures if the U.S. side puts the tariff measures into effect.” Regardless of what happens in the short term, this back and forth relating to trade and other issues is likely to remain for the foreseeable future. And if a deal is reached in the near term, it will likely only be partial in nature and mark the end of the beginning, not the final detente.