What’s Next for U.S.-China Relations?

Generally, free markets don’t like trade wars much, and we are in the midst of a massive one with China. But apart from recent gyrations, U.S. equity markets have seemed relatively oblivious to it. In contrast, in 2018 alone, some overseas and emerging markets have fallen by 15 percent or more.

We may start to gain a clearer picture of the trade war’s outcome this weekend when President Trump and Chinese President Xi Jinping will meet at the G20 Leaders’ Summit in Argentina. Will they attempt to defuse the situation or continue to harden their positions?

So far—well after the initial U.S. imposition of $250 billion in tariffs on Chinese goods—there have been few signs of compromise. In a protracted game of political chicken, both sides have forcefully defended their own trade policies. But as the inevitable near-term economic pain starts to set in, it’s unclear if either side will have the political will to hold onto their positions.

As of this writing, economic data has been softening across the globe in both developed and emerging markets. An extended trade war risks roiling markets further. While an accord wouldn’t resolve all the differences between China and the U.S.—there are simply too many of them—a meaningful effort towards reconciliation would give financial markets reasons for optimism.

Meanwhile, the markets remain skeptical. According to a recent Wall Street Journal article (for subscribers only), Credit Suisse foresees just a 10 percent chance that China will agree to buy more U.S. goods and open its markets to international investors—two critical points for the U.S. In fact, the bank sees only a 25 percent probability that an agreement will be forged at all. Without an agreement, there is a good chance the current tariffs will soldier on for some time.

For a well-balanced primer on the U.S.-China Trade War and what it means for investors, see “Will Trump Hit Pause on the Trade War With China?” from www.ForeignPolicy.com.