The more vulnerable both parties think they are, the stronger the will to compromise in the trade war will be!
The markets are currently almost euphoric when it comes to the trade conflict. The widespread opinion is that there will soon be a solution. Tonight (as on Saturday), better than expected purchasing managers’ indices came from China. Beijing could draw from these figures: the US tariffs are not a real problem for China’s economy. We can therefore continue to wait and see whether we can negotiate better conditions with the US, especially as Donald Trump wants to avoid an escalation in the trade war before the elections in November 2020.
This is exactly what a tweet of the always well-informed CNBC correspondent in Beijing, Eunice Yoon, suggests:
Beijing continues to insist on the abolition of all or some of the punitive tariffs as a condition for a Phase 1 deal. As Eunice Yoon notes with reference to the press in China:
The US economic data were also better than expected recently (GDP revised upwards to +2.1%). In addition, the all-time highs on the US stock markets in particular are likely to be perceived by US President Trump as a sign of the strength of the USA. Beijing believes it can wait and see, and Trump believes that tariffs have not harmed the US economy. So why not escalate the trade war further to lead the struggle against the challenger China from a position of strength?
One thing seems clear: the more vulnerable both parties think they are, the stronger the will to reach a compromise will be! Or, in the language of Wall Street: “no pain, no deal”.
Meanwhile, it seems clear that the Hong Kong question is increasingly becoming an obstacle to this Phase 1 deal, as the political insider magazine Axios reports.
China announced this morning that US warships would no longer be allowed to call at Hong Kong port. US NGOs, whose representatives will probably soon be expelled from Hong Kong, are being sanctioned. It will be interesting to see how the Trump administration reacts to this today.
Either way, bad news. Especially from the economic side, both in the US and in China, would be better news when it comes to the trade war. The same applies to falling stock markets. Instead of always rising to new all-time highs. Wall Street in particular is so overbought that a sharper correction should be on the cards. And the most likely reason for such a correction would be a burst of hopes in the trade war.
If Trump does not suspend the tariffs, which are planned for December 15th and mainly concern consumer products, it could become a little more uncomfortable. Because Trump will then rely on the Fed, which would already “bail out” the stock markets. It’s just a question of whether the Fed will fulfil Trump’s wish.