06 Nov 2019
The trade war continues to dominate the talk around markets. They are currently working out a mini deal which is not about the major issues, but seems to have buoyed market confidence, even though markets are higher now, than when analysts and the public all thought it was a bit of Trump showmanship.
We are going to attempt to give you a short, but comprehensive outline of the issues involved.
- Chinese tariffs dropped on US imports (before all of this, China had more tariffs on US goods, than the US had on China);
- Chinese currency manipulation. They stopped ages ago and are if anything more supportive of the Chinese currency.
- Access to markets, in particular finance and technology. Finance should get an entry, but with Chinese rules and Google’s T-shirt and jeans employees, this may not mix well.
- Intellectual property theft. The Americans do have a very real concern here. China forced US companies to do joint ventures if they wanted to have operations in China and had to share all of their technological and trade secrets. Chinese officials required extremely detailed data and had regular inspections, as part of their “regulation and supervision”. The Chinese are going to have to give up these practices and do this more subtly in the future.
- Enforcement mechanism. Trump will not want to remove the tariffs as he would see it as a way of ensuring China complies with any agreement. China wants the tariffs gone as part of the agreement and there is a nationalistic view in the country, that they should not ever again to be made to sign an unfair contract by the imperialists.
- The US wants the Chinese to stop subsidising (either with actual subsidies or via funding state enterprises) industries that they want to excel at (high tech). That is something that is extremely unlikely to happen. Not only is it China’s strategy, but it is also a main leveller of control for the party.
- The other factor to throw into the mix is Trump may not be around in a year, while Xi has the job for life.
One would think a more comprehensive deal is wanted, so we think the major issue to address will be enforcement.
However, that would assume both parties act rationally, which is a lot to hope for.
For further information or to discuss how we can help you, please speak to your adviser.