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G20 stare down does not de-escalate tensions

It would be easy to see last weekend’s G201 meeting a heralding a thaw in the U.S.-China trade war. But it hasn’t.

There are some positives. It appears increasingly likely that the U.S. will not put in place a fresh 10-25% tariff hike in January on $250 billion of Chinese exports, as most had thought. It also pushes back the prospect of additional tariffs on $267 billion of remaining imports to the U.S. from China.

But that is where the optimism should end. The agreement at the weekend is really just a pause in the fighting, not a de-escalation.

The agreement at the weekend is really just a pause in the fighting, not a de-escalation.

A 90-day truce is not enough time to bridge the differences even if both nations acted in goodwill. Ominous signs of a disconnect have already appeared. Official communications from China did not recognize the 90-day deadline while there has been no corroboration on U.S. President Donald Trump’s claim that the Chinese will reduce tariffs on U.S. auto imports.

Both President Trump and Chinese President Xi Jinping have domestic agendas that mean the two countries remain on a collision course.

The U.S. has two broad aims. One is to help restore jobs in domestic manufacturing. This is a direct appeal to the blue-collar workers that form the core of Mr Trump’s base of support.

The other is to rebalance the diplomatic and economic relationship with China. Both objectives are underpinned by a belief that the terms of trade with China are not fair.

China has its own objectives; its ”One Belt One Road”2 initiative is the largest effort globally by any country to extend its influence far beyond its borders. It emphasizes trade on Chinese terms at its very core.

Meanwhile, China is pressing on with its “Made in China 2025” initiative. The industrial policy is an ambitious attempt to expand its high-tech sector and establish an advanced manufacturing base.

China’s view is that “Made in China 2025” is a bold attempt to borrow from the industrial policies of other countries to establish industries that will allow the country to compete in a fast-evolving world economy. The U.S. sees it not only as a threat to U.S. companies, but also a significant security risk.

A trade war is the last thing the global economy needs. The medium-term outlook is already dim, with weak productivity growth, persistent global imbalances, rising financial vulnerabilities and income inequality.

President Trump is unlikely to change tack unless there is some domestic political backlash, a really disruptive bout of financial market volatility or U.S. growth hits the buffers.

The mid-term elections suggest that his domestic audience is supportive of the more confrontational approach towards China. With possibly only two years of the presidency remaining, he most likely will not seek to declare victory and move on.

A slowdown in the U.S. economy would be more likely to force Trump to change his tune. However, the trade measures have yet to meaningfully bite U.S. economic growth, with the G20 deal simply a stay of execution.

At a broad strategic level, China does not want to be seen to concede to what it might regard as U.S. bullying tactics.

However, a global economic downturn would complicate China’s already difficult task of engineering a controlled slowdown in its economy. The problem is that few of its proposed concessions are likely to appease Trump’s leadership team or his domestic audience. Appeasement could simply lead to more demands.

Without a resolution in sight, an economic slowdown may be inevitable. The irony is that the blue-collar workers who support Trump will be among the hardest hit. There are no winners in trade wars—only compromises. Sadly, we cannot expect many of these soon.

1The G20 (or Group of 20) is an international forum for the governments and central bank governors from 19 countries and the European Union.

2China’s “One Belt One Road” initiative, established by President Xi Jinping, is a project that focuses on improving connectivity and cooperation among multiple countries spread across the continents of Asia, Africa and Europe.

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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