China Trade War — A Long Slog Ahead; Tensions Rise in the Persian Gulf
Author: Greg Valliere
May 13, 2019
IT’S DIFFICULT TO BE OPTIMISTIC on China trade talks after reading the lengthy piece in this morning’s Wall Street Journal, which makes it clear that several major issues — intellectual property theft, technology transfers, an enforcement mechanism, etc. — are still unresolved.
THE BEST CASE SCENARIO is that a deal could be finished by late next month, when Presidents Trump and Xi will meet at the G-20 summit in Japan on June 28-29. We had predicted a pact by the end of May, but that looks unlikely — and this may get worse before it looks better, as China prepares to retaliate this week.
THE BIGGEST LOSER will be the reeling U.S. agricultural community, already in a serious recession. The prospect of sharply reduced shipments to China could spark fears of a depression in the farm belt states, which Trump has to virtually sweep if he wants a second term.
FOR NOW, WE THINK TRUMP will receive widespread backing for his tough stance on China; a surprising percentage of Democrats agree with him, and the impact on the overall economy will be modest. GDP probably is growing by a little less than 3% now, so a loss of a few tenths of a percent should not generate fears of a major slowdown.
BUT A PROTRACTED IMPASSE can’t be ruled out, still another reason why the Federal Reserve can stay on the sidelines. A choppy stock market — over-reacting to every tweet — is possible between now and late June, which could exert downward pressure on interest rates. Could a trade war heat up inflation? No time soon. Could a trade war prompt China to consider dumping U.S.Treasuries? That would simply hurt their own portfolio.
BOTTOM LINE: We still think there will be a deal because both countries need one. But this may require personal diplomacy between Trump and Xi in late June — and even then it may take weeks after they meet to iron out all of the contentious issues. We think there’s a 60% chance of a solid deal, perhaps by late summer; that’s down from our 70% odds earlier this year.
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THE MORE IMMEDIATE GLOBAL THREAT is in the Persian Gulf, where two Saudi oil tankers were hit by sabotage overnight. Trump and his advisers have an intense antipathy toward Iran; the U.S. announced this morning that more Patriot missiles will be sent to the region, part of a massive American buildup as tensions grow between Iran and Saudi Arabia.
THE U.S. WILL NEGOTIATE WITH CHINA, RUSSIA, MAYBE EVEN NORTH KOREA, but the U.S. and Iran are mortal enemies, unlikely to talk. Perhaps a neutral intermediary could ease tensions between the two countries, but the great fear is a miscalculation — a minor incident in the Gulf that could spin out of control.
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