A Deal with China?

A Deal with China?

The trade war that US President Donald Trump began this year is still developing and sending harmful ripples through the global economy. Stock markets have been hit particularly hard, as have some commodities, as a result of slowing economic growth. However, this week some of those losses are stabilizing and investors seem optimistic for the first time in months – why is that?

For months now the United States have been trying to pressure China into changing its policies and using trade tariffs for that purpose. Trump’s administration’s logic is the following: unless China complies, we would impose more tariffs; rinse and repeat until the pressure gets too much and China gives in. Somewhat understandably, China has stated before the World Trade Organization that this is bullying and so far has chosen to implement their own reciprocal tariffs in return. Even earlier this week Trump threatened more tariffs, as a testament to how volatile the whole situation is.

Nevertheless, yesterday Trump and Xi Jinping, the President of China, held an important phone conversation that was lauded by both as the beginning of an agreement that would be finalized when the two meet in person at the G20 summit on November 30 in Argentina. Trump was quite positive that the two countries are making progress towards resolving their differences, while the Chinese government was more temperate in their response, but still confirmed that the talk was illuminating. According to preliminary information, the US President’s administration is already working on a draft for a trade agreement that Trump hopes can be signed at the end of the month.

The news has had wide-ranging effects on the financial markets. Stocks in both the United States and East Asia have stabilized today, and so did European indices. The Chinese yuan, which has been weakening for the greater portion of 2018, made a 0.4% recovery.

However, this all seems a bit peculiar considering how harsh Trump’s tone has been against China up to this point. He’s called the government a currency manipulator on several accounts, and he’s hit them with quite substantial tariffs. Moreover, several Chinese tech companies have run into trouble with their American partners, a couple being brought to court over intellectual property issues at this very moment. Furthermore, even if the President’s intentions at making a deal with China are honest, the Chinese government is known for its prudence and slow, careful actions. It is highly unlikely that a deal drafted in under four weeks would be more convincing than over $250 billion worth of tariffs have been. In other words, analysts don’t expect China to agree to change its ways anytime soon.

A much more probable explanation for this week’s surprisingly positive developments is that President Trump is trying to boost his own repute with US citizens as we are nearing an important milestone in his presidency – the midterm elections. Held just a few days from now, on November 6, these elections offer American voters the chance to completely replace all 435 politicians in the House of Representatives, about 30% of the Senate, and many local positions. With low approval ratings and multiple issues in his presidency so far, Trump might find the Republican party losing quite a lot of ground to the Democrats next week, which would then make his own legislation difficult to implement.

In any event, we don’t know much about his trade agreement with China and likely won’t find out more until the G20 summit. Until then, the markets remain volatile and susceptible to all kinds of news.

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