Jul 2, 2019
The highly anticipated G20 Summit seemed to have concluded in a nice conciliatory note as the world powers converged in Osaka this past weekend. Or did it? While it seemed to have eliminated the “total risk-off” worst case scenario, and perhaps rebuilt confidence for China equities especially the new economy sectors, beyond the rhetoric, what we have is not really a pause in the trade war. The war continues as evident in the tariffs. A more accurate description is that both sides have agreed not to escalate the trade war while talks resume.
In the world heavyweight contest analogy, China won that last round. For all Donald Trump’s pre-fight “thrash talk”, he didn’t throw any punches at Osaka. Indeed, he conceded the round. There were no additions to the 25% tariff list, some easing of sanctions on Huawei, and some unsubstantiated claims of Chinese promises to buy a lot of American stuff.
That’s where the deciphering of the rhetoric comes in.
Donald Trump said China will buy a “tremendous” amount of food and agricultural products from the US. The Chinese merely said that was what President Trump wanted. President Trump threatened tariffs in future if there was no deal to be had. The Chinese were silent. The Chinese said negotiations had to be equal and show mutual respect. The Americans were silent.
Basically, they talked past one another. So, what can we take away from this?
China won the Osaka round. Donald Trump made concessions on Huawei, without any clear reciprocal concession from China. All we know for sure is President Trump claims that China will buy a “tremendous” amount of stuff from the US. And the Chinese quoted President Trump saying he hoped China can increase imports from the US.
And in offering the ban on sales to Huawei as a negotiating pawn, President Trump has given the world a glimpse into his thinking. That is, he may not share the thinking that Huawei is the national security threat that China hawks in the US say it is. In short, Huawei may be negotiable. Which then begs the question: “What else is negotiable?” Bans on technology sales to other Chinese companies? State subsidies for industries? The People’s Bank of China’s management of the Yuan? The monitoring/enforcement mechanism to ensure China’s compliance?
But the trade is war is far from over – indeed it continues. Remember that 25% tariffs remain on $200 billion of Chinese goods. As do Chinese retaliatory tariffs on US goods. The discovery process of both parties’ “price” for a deal will continue while those tariffs continue.
President Trump will talk with the Chinese over coming months. But he will likely also continue to make threats and reverse previously stated positions – such is the mercurial President.
Even the concession on US sales to Huawei, which was couched in terms of “where there is no great national emergency problem”, can be reversed on a tweet.
Also, note that US Congress can block any Presidential reinstatement of US sales to Huawei. Republican Senator Marco Rubio tweeted in response to the Huawei news: “If President Trump has in fact bargained away the recent restrictions on Huawei, then we will have to get those restrictions put back in place through legislation. And it will pass with a large veto proof majority."
And although President Trump is dangling lifting sales restrictions on Huawei as a negotiating carrot, the US Commerce Department’s Bureau of Industry and Security recently added five Chinese entities to the list of companies subject to US sales restrictions. The companies are Wuxi Jiangnan Institute of Computing Technology, Sugon, and its affiliates, Higon, Chengdu Haiguang Integrated Circuit, and Chengdu Haiguang Microelectronics Technology. Stating the obvious: the US position is contradicted.
As written in a recent Premia Partners insight "Trade War", an agreement to hold US tariffs on Chinese goods at $200 billion of goods will “give the risk markets a short-term reprieve, bearing in mind that they only buy more time before another day of reckoning down the line.” Chinese equities in particular will enjoy the perception that China own the latest round in Osaka. At least for now. But the uncertainties and volatility will continue. It is worth restating this. What we have is not even a pause in the trade war. The war continues as evident in the tariffs. A more accurate description is that both sides have agreed not to escalate the trade war while talks resume.