That does it. The market consensus on the China trade war seems to have tilted ever so slightly to President Trump caving. Tariffs don’t go up. If Barclays Capital is right, tariffs actually go down.
On Friday, Barclays said in their weekly global outlook report that their new base case scenario is for a U.S.-China trade deal that sees Washington removing the 10% tariffs on $200 billion worth of Chinese goods. It is unclear how his trade representative, Robert Lighthizer, would view this. If Trump is seen giving in to stock market pressures to cut a deal, any deal, then Lighthizer could walk. Or at best not return in theh case of a Trump re-election scenario. China would have scalped a hawk.
The tariff policy has been the means to bring China to the table for talks. Removing them buys Xi Jinping plenty of time to outlast Trump who, in theory, has less than two years left in office.
His Democratic challengers may be anti-China too, but they are more anti-Trump than anti-China. And their platform is focused on domestic matters. In other words, it is no longer clear that a bipartisan policy against China is really the new cottage industry in Washington.
U.S.-China tensions have broadened out to include economic, ideological and military dimensions. The South China Sea serves as the flashpoint for the military-minded within the American government. Last month’s global threat assessment by the U.S. intelligence agencies ranked China as the No. 1 security risk for the U.S. Mostly all of that risk stemmed from China’s move up the tech value change, and its expanding soft power throughout Asia.
Barclays’ economist Jian Chang doesn’t discount new tensions in a Washington-Beijing tech war , with Huawei being the the first battlefront.
Tariffs are not shrinking China trade. The U.S. Census Bureau reported the largest ever trade gap with China this week, over $405 billion.
BlackRock doesn’t see things as rosy as Barclays. They see these tensions as becoming structural and long-lasting. But they agree that the problems may now center on “technology and could lead to the progressive decoupling of the U.S. and Chinese tech sector,” said BlackRock Investment Institute chairman Tom Donilon.
The market has been bullish on China all year. Part of it was the usual run-up in Chinese stocks ahead of the MSCI decision to increase China’s weighting in major emerging market indexes.
It is no longer certain that Trump and Xi will meet in March or April, yet investors are convinced the Trump Administration will see the light on tariffs.
“We could see an agreement on the trade deficit and tariffs as well as on China’s market conduct and access,” Donilon and a team of BlackRock fund managers wrote in a report published today.
Implementation and enforcement will be the most challenging, everyone agrees, meaning China’s behavior is unlikely to change much anytime soon.
Investors, and American companies, may just be happy with greater market access to the world’s No. 2 economy. While domestic manufacturers continue to worry about how to best compete against China mercantilism.
In November, Barclays forecast a tariff pause and a continued battle designed to curtail China’s technological advancements. Today, they updated that base case to the “removal of 10% tariffs — after a period of compliance — and a continued tech war.”
China negotiators said in recent talks that removing tariffs was necessary to finalize a deal, Bloomberg reported this week.
Moreover, China’s leaders said this week in Beijing that they would open more markets to foreigners and recently opened an intellectual property rights court in December. There is also some agreements on not forcing a weaker yuan, though it is unclear if this is merely a gentleman’s agreement. If new tariffs were imposed, a weak yuan would erase their impact pretty quickly.
Since the tariffs began last year, the yuan has held relatively steady against the dollar, suggesting the central bank there has not tried to weaken the currency in order to make Chinese products cheaper.
Chang also wrote in her report to clients today that the probability of a better-case scenario is predicated on Trump’s perceived eagerness to strike a deal after the failed North Korea meeting in Hanoi. The need for a “win” has increased the likelihood of Trump accepting China’s demand for removal of the 10% tariff.
The tech war could intensify in place of tariffs. But that will just force China to move even faster with its planned Greater Bay Area project in the southeast. China depends on U.S. manufactured microchips and semiconducutors. They want to make their own. They will, and it is happening in that new Silicon Valley tri-city zone in China.
If everyone is moving to a position that assumes the end of tariffs, the risk is that tariffs go up. Most investors are not betting on that.
An escalation scenario could happen if Trump walks away from a deal and the U.S. does go from 10% to 25%, as Lighthizer planned to do last week before agreeing to extend the trade truce. Any reversal in the tariff threat — now perceived to be collecting dust — would crush China’s stock market.