- Bank of America says Trump’s latest actions won’t spell disaster when it comes to the US-China trade war.
- US tariffs on China are set to increase this Friday, which could cause problems for American businesses and markets.
- Despite the rhetoric, both sides are motivated to secure a deal, the bank says.
The US-China war’s latest chapter sent markets into freefall and roiled investors. But Bank of America says a resolution may be just around the corner.
After months of calm during a trade-war truce, Trump jolted the market with a call on Sunday for higher tariffs on $200 billion worth of Chinese goods to be applied starting on Friday. US trade negotiator Robert Lighthizer indicated that there had been an "erosion of commitments by China" over the deal.
The lengthy US-China dispute — over everything from market access, technology transfers, state aid, trade deficits, and surpluses — have been a major factor in global macroeconomic uncertainty. But according to the report’s author, Bank of America analyst David Woo, Trump is attempting to ramp up the stakes of the deal to further bolster his 2020 election hopes and provide an economic boost to the US.
Woo isn’t alone in this judgement.
"One cannot but sense that Mr. Trump is playing us a little," said Neil Wilson, the chief market analyst for Markets.com. "He may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes."
Market reaction to Trump’s announcement was dramatic Monday and some of that sentiment has carried into Tuesday. Bank of America even indicated a deal could be reached by this weekend and its reasons for its belief in a swift resolution are as follows:
1. Red line avoidance
Bank of America says that Trump’s tweet mentions renegotiation but fail to specify what, if anything, China is reneging on. This suggests that no new deal breakers or red lines have been created in the most recent talks, according to Bank of America.
2. The rocket man levy
Trump’s decision to bring in Friday’s deadline came just a day after North Korea’s decision to hold its first nuclear test since November 2017.
US negotiations with China have coincided with Trump’s talks with North Korean leader Kim Jong Un. Bank of America suggests says that Pyongyang has been playing the US against China for the past two years.
The Washington Post calls this the "specter of escalating tensions" over the White House’s foreign policy. Getting North Korea to denuclearize would require sweeping international sanctions from China — something Kim Jong Un has been resisting.
A hard deadline for the trade negotiations might tempt China to take the trade conflict off the table first, making it simpler to then resolve the North Korea issue.
3. Getting the US public onside
Bank of America says that Trump’s decision to raise the stakes late on could indicate his desire to take greater credit for any subsequent deal struck between the two countries.
"An aggressive stance now might help, especially if recent press reports that the US has softened the call that China halt cyber theft and tempered demands that China curb industrial subsidies are true," according to Woo.
President Trump would need to convince the American public that the deal struck is in the US’s best interests and playing up the strength of his negotiating team at a late stage could go some way to doing that.
This chart shows that China’s export growth has been steadily slowing since the beginning of the trade war, having previously been at recent highs:
Datastream, Bank of America
4. China is running out of time
While the trade war has impacted both countries’ businesses and industry, there are signs that China is running out of time to resolve the dispute with cracks appearing in its economy. Bank of America says that despite some "green shoots" in the heavily indebted property sector, China’s economy is dragging. It seems likely, according to BAML, that China would prefer a trade deal to another bout of credit expansion, given the overarching concerns about leverage.
As the below chart shows, China’s property market has been taking a beating in recent year due to the trade war, amongst other things:
Datastream, Bank of America
5. Elections are coming
Despite Trump’s latest salvo, the president has demonstrated that getting a deal is more important than getting every single thing he wants from the negotiations, according to the note.
Bank of America points out that the NAFTA negotiations were finalized before the Mexican elections, even with existing red lines not resolved with Canada’s Prime Minister Justin Trudeau last October.
With the 2020 elections on the horizon, Bank of America says that Trump would prefer the economic tailwind and presumed acclaim from a China deal than a lingering disagreement weighing on investors and businesses. This is evidenced by the below chart which indicates that greater uncertainty about the trade war is having an impact on investment.
BofA Merrill Lynch Global Research
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