This weekend’s upcoming G20 meeting and scheduled talks between President Donald Trump and President Xi Jinping represent an important milestone in the current trade conflict between the US and China. While the situation is highly unpredictable and there are a few scenarios that could result, we expect the markets to react so we would like to be prepared.
To recap: the US has imposed tariffs on China to correct perceived imbalances in the bilateral trade relationship. In addition, concerns over Chinese technological advances and growing global influence have driven US insecurities. To confront these broader concerns, the US has implemented other non-tariff barriers such as tighter restrictions on Chinese investment in the US, restricted market access for Chinese companies such as Huawei, and export quotas on high-tech goods.
Amongst the rhetoric, there are many areas that President Trump would like to address but when stripped back there are three main priorities for the US:
When assessing these three priority areas, what is interesting to note is that a resolution in all three is in the interest of both the US and China – and both leaders know this. Reducing the bilateral trade imbalance, further opening domestic markets, and improving protection for intellectual property are in the interests of both the US and China. Further, tariffs have not worked to either reduce the US trade deficit or bring jobs back to the US, and in today’s world of sophisticated supply chains they likely won’t work. With the US and China both facing domestic economic risks, and tariffs further exacerbating those risks, there is now a window of opportunity for a ceasefire-type resolution, or at least an agreement to engage in continuing negotiations around tariffs.
So what can we expect from the meeting? We think that there are three potential outcomes:
While the situation is highly unpredictable, as the leaders head into the talks there are many positive signals to suggest that an agreement could be reached (outcome #2 above), including a clear willingness on both sides to negotiate. Ultimately, the most important question to answer is: are tariffs meant to be negotiated away or are they a permanent structural shift. As mentioned above, if the US intends to negotiate there is now a window of opportunity from a position of cyclical economic strength before tariffs begin to hurt the US consumer or cause further downside to US equities.
However, even if a compromise is reached on Saturday regarding tariffs, it’s important to remember that trade is only one aspect of tensions. The likelihood is that the US will still pursue restrictive non-tariff barriers mentioned above. And over the longer-run these can be more damaging economically. The US and China have entered a new phase of confrontational relations and uncertainty could persist. Nonetheless, if both nations can step back from the trade brink, this positive step should not be overlooked.
So what does this all mean? We can think now about the scenarios outlined above and position your portfolio appropriately and act on the outcome of the talks.
For ideas on how to incorporate these views in a way that is suitable for you, we invite you to contact your J.P. Morgan representative.
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