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China Trade Tensions Ease

China Trade Tensions Ease

| December 03, 2018

Since trade tensions between the United States and China escalated earlier this year, uncertainty relative to supply chains, input costs, global economic growth, and corporate profits has weighed on the financial markets.

Indeed, stocks struggled in the second quarter and only gained traction once the U.S. decided to not fight a multi-front trade war in July. Progress with South Korea, Japan, Europe, Mexico, and Canada during the summer months enabled U.S. stocks to climb nearly seven percent in the third quarter.

Yet stalled capital investment during Q3, among other factors, contributed to equity market weakness in October. Investors were justifiably concerned about the impacts a trade war could have on global demand and corporate earnings.

Consequently, anticipation was high for progress in trade talks with China during this past weekend’s G-20 meeting in Buenos Aires, highlighted by a dinner with President Xi and President Trump.

Fortunately, the U.S. and China reached an agreement to ease tensions and increase discussions over the next 90 days to arrive (hopefully) at an amicable solution. The truce will result in the U.S. postponing plans to increase tariffs from 10% to 25% on $200 billion of Chinese goods (originally set for the beginning of 2019) while the two countries restart more formal negotiations on a variety of contentious issues.

The two sides are set to begin meetings in Washington, D.C. in mid-December, with a focus on the longstanding issues troubling American business leaders, including China’s broad economic policy, forced technology transfer, intellectual property protection, non-tariff barriers, and cyber security, among others. To help narrow the trade deficit, China will also address plans to lower tariffs and increase purchases of U.S. goods in agriculture, energy, industrials, and technology. Opening these markets should help restore balance to global trade while reducing the costs of cross-border commerce. However, it’s important to note that this agreement is not a final solution, but rather a path toward progress in the trade conflict.

To the extent that this development provides a way forward, businesses can reenergize their capital expenditure plans for 2019. In addition, with improved clarity on interest rates and oil prices, we look for investors to bid up equity prices as economic conditions firm on improved productivity, lower inflationary pressures, and higher corporate profits.


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