Overview
No further escalation
For now, there will be no further tariff escalation, with negotiations continuing after a six-week stalemate. Trump also indicated that the US Commerce Department would discuss whether Chinese technology giant Huawei, now subject to a ban on purchasing US technology, could be allowed to procure certain American goods - although presumably those that could not be used in national security or military concerns, which may still prove to be a large and critical segment. A complete reversal of Huawei’s blacklisting was not confirmed, nor does it look likely.
Trump proclaimed that China will start buying “tremendous” quantities of US agricultural goods, although official Chinese media described this as more of a “hope”. Perhaps more concrete was China offering a hand with North Korean denuclearisation.
Uncertainty over Huawei
The dispute has been made even messier by the inclusion of Huawei. Arguably the US is right to worry that supplying even an apparently private-sector Chinese company with potentially military technology, or even technology that could enable access to sensitive systems, could have national security consequences.
China now views Huawei as an integral part of any trade agreement. Trump seems to agree here and may well like using it as negotiating leverage.
The complicated interlinkage of state and enterprise seen with Huawei is, in many ways, a key symptom of the trade tensions - whether concerns are over free market incentives, fair market access, or national security. It is why, despite today’s ‘truce’, a full and decisive US-China agreement seems unlikely any time soon.
A weak green light for global macro
Global government bond yields, which have plunged in response to global growth concerns, are likely to back up in the near term. The US dollar could start to soften more significantly, in response to slowing US domestic growth and monetary easing, as the greenback’s risk-off bid fades and concerns about a falling renminbi are put on ice; this would be good news for emerging market assets.
However, it is wise not to exaggerate the impact of US-China tariffs, and this weekend’s headlines, on global growth. For one thing, tariff uncertainty will continue to have a dampening effect on capex in the US and China.
But these are large, domestically-oriented economies with plenty of growth drivers and policy tools, and so neither is likely to be plunged into a deep slowdown by trade policy. Indeed, the hastening of supply chains moving out of China merely accelerates a natural trend that was already in place, and actually helps growth in some other economies.
Beyond trade policy gyrations, the simultaneous move from both China’s financial and fiscal authorities and the US Federal Reserve from highly restrictive policies in 2018 to an easier footing in 2019 are likely to have even larger incremental impacts on global growth. This is especially true outside the US and China.
This weekend’s developments make it that much more likely than the ‘green shoots’ of global recovery that are starting to be seen in some areas are not killed off before they fully take root.
