A trade deal between
China and the United States

Financial markets jitter at each tweet related to the trade negotiation between America and China

By Jean-Luc Burlone

MAY 18, 2019

Expectations run high for a resolution of the trade war between United States and China and a deadlock bodes trouble for discussions on more important issues that range from 5G wireless technology to globalization and from nuclear proliferation to Climate change.

Concentrating on the business angle, the IMF puts it clearly; a trade deal will be a positive catalyst for global trade but if held in check, it will be a damaging blow to the world economy. For their part, financial analysts have raised diverse arguments about the impact of a potential deal.

Bank analysts see a continuing bull market and they estimate that a resolution to the trade war, with lasting, new and good operating conditions, will be beneficial to American companies whose augmented earnings will feed financial markets and spur economic growth. Their rationale concludes that American bank stocks are a buying opportunities as banks will face an increased demand for credit and advices from companies that seek investing in China.

… a deadlock bodes trouble for discussions on more important issues ranging from 5G wireless technology to globalization and from nuclear proliferation to Climate change.

Others say that a resolution of the dispute is already reflected in stock prices. Markets will correct on negative news but remain somewhat stable otherwise. Only if the deal falls through, will markets react and negatively so. Accordingly, they doubt that any deal will have a lasting impact and they suggest the “buy the rumour and sell the news” strategy as the most appropriate one for investors.

Somewhat in line with this analysis, economist Larry Summers noted that the US stock market ($30 trillion) has erased as much as $700 billion of wealth on the Monday after Trump tweeted the imposition of new tariffs that will have a direct impact of about $10 billion on the value of US corporations.

Such a discrepancy may be just a market overreaction but it may also reveal the fear that more serious problems that lay ahead will not be tackled efficiently if the two most powerful economies in the world fail to agree on simpler trade issues. As China and the US remain in the midst of a power conflict that will overhang uncertainty over financial markets for some time, any trade deal will only be a temporary boost to the economy.

Indeed, even if tariffs and intellectual property are settled, technology, weaponry and military issues—North Korea for one—are left dangling for now. Tensions and battles for political influence and technological supremacy are at play between those two very distinct political and economic systems that compete with their wealth, values, beliefs and history to dominate the world.

‘As China and the US remain in the midst of a power conflict that will overhang uncertainty over financial markets for some time, any trade deal will only be a temporary boost to the economy.’

The Chinese way

Though it joined the WTO in 2001, we no longer expect China to join the liberal world. Its economy remains dominated by the state, that is by the Chinese Communist Party (the Party), whose primary goal is to retain power.

To remain at the helm of the country, the Party must keep the population satisfied with a rising level of income. Long-term economic growth is therefore essential for China and its economic prowess has become its business card to export Xi Jinping’s vision throughout the world.

The ideology contrasts with the American world order of the passed 70 years. Rather than a system of allies, China offers economic partnerships; instead of promoting national interest, it proposes shared interest; and to an internet ruled by stakeholders China suggests an internet ruled by governments… a no-brainer for liberal countries that see the internet as an information vehicle.

China uses its economic success and wealth as well as its ability to identify and to address development needs in other regions to lure countries into joining the Belt Road Initiative (BRI)—an intricate web of political and financial ties. BRI attracts over 60 countries, including some Western European ones. But China’s largess comes at a price and its soft power has gained little traction among a large portion of the world population.

As the world’s largest trading power, China is a natural leader of globalization but its leadership is rightly perceived as threatening the very principles of international trade: free flow of capital, people and information. China’s rejection of an open market for ideas generates costly inefficiencies to its economy; a situation that the Party tolerates in the short term to realize its long-term economic and political dominance.

Trade wise, Chinese exports to America represent 4% of its GDP or roughly an impact of +/-1.5% on its economic growth—it may be an acceptable price for China’s long-term vision. In this context, a trade deal with the United States is an important issue, no doubt, but also a short-term one for China. In today’s intricate world, pressure from stakeholders may hopefully bring a sensible ending to the trade war.

Investment wise, companies that are reliant on global trade should exercise caution; they must be aware of supply chain disruptions in various sectors and they must adapt accordingly and rapidly to avoid losses.

Investing in China is for expert investors only. Prudent investors should seek companies with secured and stable earnings and cash flows and they should keep track of corporate growth strategies and tactics.

Feature image: New-York by Michał Ludwiczak from Pexels; Shanghai by Wolfram K from Pexels