Investors received some good news from the recent G20 meeting in Japan after US President Trump and Chinese President Xi Jinping agreed to a truce in their trade war.
After a meeting on the sidelines of the summit, Trump agreed to resume trade talks with China and said he would not be adding further tariffs to Chinese imports.
But does this mean that the US and China are closer to finally resolving the trade war?
It is understandable if investors are a bit sceptical about developments in Japan because this is the third truce. China and the US agreed to a truce around May last year, then tariffs started up again.
In December last year they struck another truce at the G20 summit in Argentina, with new tariffs halted for 90 days. But talks broke down in May with Trump accusing the Chinese of backsliding on commitments. Trump ramped up US tariffs again, triggering a Chinese response.
Hopefully Trump and Xi will be successful this time.
It’s vital for the global economy and financial markets that the two presidents resolve this issue for the simple reason that, since around June last year when the trade war really started to escalate, we have seen quite a significant fall in business conditions and business confidence world-wide.
The trade war is already dampening business investment in the US and is a threat to business investment globally.
Tariffs and trade barriers are disrupting global supply chains. Businesses are becoming uncertain about where they can locate their factories, who they can trade with, and who will be disrupted. That’s caused a lot of consternation.
It is clearly in both sides’ interest to resolve this issue. If the trade war isn’t resolved, the global economy may slow further.
It will also put a question mark over President Trump’s re-election prospects at next year’s Presidential election. A trade war could see unemployment rise and increase the risk of a recession, and could damage Trump’s re-election chances.
There is a significant risk that this truce will end in failure again. But I think, ultimately, they will resolve this issue. Our base case remains that there will be a deal.
The problem is that it may take a little while to get there. Investors therefore should brace for the trade war to potentially trigger more volatility in share markets and investment markets generally.
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