Grim Prospects For A US-China Truce

As US President Donald Trump sticks to his threats of additional tariffs on China, portfolio managers Penelope Foley and David Loevinger of asset management firm TCW Group believe a de-escalation between the world’s two largest economies is not in sight.

“It is hard to see a resolution in the next month,” Foley said at a private event in New York this month. “Both the US and China are taking a slightly harder line. Unless markets move in a way that gets their attention, which has not happened yet, I doubt you will see a resolution in a very short-term.”

Trump and China’s president Xi Jinping are expected to meet later this month at the G20, scheduled June 28-29 in Osaka, Japan.

TCW’s Loevinger believes Washington and Beijing are not as close to sealing a deal on trade as they have portrayed. Enforcement, for example, is one contentious issue between the two countries. Additionally, the US has what Loevinger refers to as three main groups with different objectives surrounding trade.

“First, you have the ‘Buy More Stuff’ faction. Second, the US Chamber of Commerce faction, which focuses on intellectual property and market access,” Loevinger said. “And then you have the Cold Warriors…their agenda is to weaken, isolate and destabilize China. They see China as an essential threat. The [Cold Warriors] have been gaining power within the administration.”

Following the breakdown of trade talks in May, Trump hiked tariffs on $200 billion worth of Chinese goods. The US also imposed restrictions on China’s technology giants Huawei and DJL on the grounds of national security. In turn, China threatened to cut off its export on rare earth minerals, which are used in most tech products.

The growing tensions have now found their way into the education and tourism sectors. China’s Ministry of Education has issued a warning to aspiring and current students about studying in the US claiming that the US visa refusal rate has increased. Beijing also asked its nationals to fully assess the risks prior to traveling to the United States citing that tourists may face law enforcement harassment, gun violence, robberies, or theft.

Playing A Long Game

BNP Paribas’ Chief China economist Xingdong Chen believes pressure on China will continue to increase.

“It is definitely more than trade. It’s a technology, financial and economic conflict,” Chen said. “More and more, Chinese people believe that the US is determined to contain [China’s] technology development and China’s further rising.”

When asked about any chance that the two countries would reach a trade agreement before the US presidential election campaign kicks off at the end of this year, Chen said the political climate is not optimal and as a result, the possibility is very low and “almost impossible” to reach.

“Under such circumstances, BNP forecasts China’s GDP growth in 2019 to be 6.2 percent. Next year, at this very moment, we believe that it would be 6 percent or below”

Chen explained if Trump were to hike the tariffs from 10 to 25 percent on the rest of Chinese imports, China will be taking a deeper hit and the country’s growth rate may come down to 5.5 percent.

Weighing in on the issue, former China’s commerce minister Chen Deming told Bloomberg that he expected the trade war to last about 3 to 5 years as opposed to Alibaba executive Jack Ma’s prediction of 20 years.

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