With less than a month before the temporary trade truce between the US and China expires, markets are honed in on the high-level trade talks between the US and Beijing that began on Wednesday. At this point, just a snippet of information has the potential to accelerate market sentiment in one direction or another, because if the two super powers don’t reach an amicable deal before March 2nd , the Trump administration has threatened to raise tariffs from 10% to 25% on $200 billion worth of Chinese imports. This could potentially ignite a full-blown trade war, from which neither economy would come out unscathed.
So far, nothing concrete has emerged. On Thursday, Donald Trump met China’s chief trade negotiator in the Oval Office to discuss key issues such as China’s intellectual property and technology transfer practices as well as the trade deficit. Following this, mid-February, Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer will head to China for the next round of talks. However, discussions will hit a crescendo when Trump himself meets President Xi Jinping – he has already stated that no deal could be struck until this occurs. Trump seems to believe he has the upper hand, having made comments such as: “China posts slowest economic numbers since 1990 due to US trade tensions and new policies… Makes so much sense for China to finally do a Real Deal, and stop playing around!” It has been feared that the US’ indictment of Huawei CFO Meng Wanzhou could turn things sour.
Until the two reach some sort of agreement, companies, investors and even central banks are left in a limbo of uncertainty. Following the latest Fed meeting, the Chairman Jerome Powell expressed his concern about prolonged negotiations: “The concern is a longer drawn-out set of negotiations, which could result in sapping business. Uncertainty is not the friend of business.” Already, in Autumn last year, following the roll-out of import tariffs (predominantly on steel and aluminium), dozens of US manufacturing firms testified before Congress about the trade war's negative ramifications on their businesses.
Beijing has been seen to make some concessions, but a pledge to close the trade deficit (which was $323 billion in 2018) by buying more US goods by 2024 has been greeted with scepticism. Beijing went even further in extending the olive branch last week, with lawmakers completing a second review of a new law aimed at protecting the intellectual property of foreign investors and banning forced technology transfers. It is yet to be seen if this goes far enough to appease the Trump administration.
Hopefully the two sides can reach common ground because the interconnectedness of the global trading system means that a protectionist shock would reverberate through the world economy. Global growth would likely take a hit which in turn would seep into commodity prices and company earnings.
The trade war has been a key risk consideration in our portfolio construction over the past year. In acknowledging the volatility that something so simple as a tweet by Trump could catalyse, we have bubble-wrapped our equity overweight with a layer of high-quality, liquid bonds. If we see de-escalation, the cash parked in these assets for the time being can quite easily be re-deployed into the equity market, if conditions merit.